Republican Bill Moves Debt-Ceiling Process Forward

by Michael Halloran May 1, 2023
Now that House Republicans passed the Limit, Save, Grow Act of 2023, which proposes to raise the nation’s $31.4 trillion borrowing limit in exchange for deep government spending cuts, we have the following thoughts.
  1. We continue to believe a deal is reached in time to avoid a technical default and view the passage of the House bill as the first step toward reaching a deal. Despite previous dire predictions about a default, the debt ceiling has always been raised and Republican Senate Minority Leader Mitch McConnell and House Speaker Kevin McCarthy have both reiterated that a default is simply unacceptable and that it is not going to happen.

  2. The House bill raises the debt limit until the earlier of March 31, 2024, or when debt has increased by $1.5 trillion. Most of the other policies in the bill are likely to be dropped from it before a debt-limit increase can pass the Democratically controlled Senate, and the eventual debt-limit increase is likely to last until after the November 2024 election, so few of the details in this bill reflect the likely outcome.

  3. However, passing a debt-limit bill with near-unanimous Republican support (four Republicans voted against) is likely to put weight behind Republican insistence that the White House and congressional Democrats engage in negotiations on policy changes to accompany a debt-limit increase.

  4. In the unlikely scenario that a deal is not reached in time and the Treasury is forced to prioritize payments, millions of Americans would be directly affected (not receiving their Social Security checks, not being paid for services rendered, employees not getting paid, etc.). The political pressure to reach a deal will be immense, so even if Congress goes past the deadline, a deal is likely to be reached within hours or days of checks not going out. Importantly, bondholders would be prioritized and would get paid in any scenario—avoiding a worse-case outcome for financial markets.

  5. Our view continues to be that panicking out of the equity market carries more risk than remaining in a portfolio consistent with an individual’s well-reasoned asset allocation. If a less-exposed posture is desirable, lowering overall portfolio beta while possibly adding to cash might be employed.

  6. Minimally, this might be a good time to review an asset allocation to be certain it is consistent with intermediate and longer-term objectives. It is not a time to make major and drastic news (noise)- induced changes.
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About the author

Michael Halloran

Equity Strategist

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