Further Progress on a Debt-Ceiling Deal

We continue to advocate that investors remain in a portfolio consistent with their well-reasoned asset allocation and have the following thoughts concerning the debt negotiations.

1. As a result of yesterday’s meeting, the primary negotiators will be reduced to expedite a compromise. President Biden will be represented by Shalanda Young, head of OMB with a strong understanding of the budget, and Steve Ricchetti, a longtime Biden aide who helped seal the deal on the 2021 infrastructure legislation. Republicans will be represented by Rep. Garret Graves (R-LA) and top aides to Speaker McCarthy. These seasoned negotiators will meet regularly going forward.
2. Speaker McCarthy says a deal needs to be reached by the end of this week to raise the limit before June 1 (Treasury Secretary Yellen’s stated debt-ceiling deadline). He argues the House will need three to four days to process a bill and the Senate could take a week. Importantly, President Biden has indicated he will hold a press conference on Sunday, when he returns from the G7 Leaders’ Summit in Japan (a trip he is cutting short).
3. If negotiations are progressing, but additional time is needed to finalize details, it’s possible a short-term debt-limit increase would be required. However, it’s unlikely anyone wants to vote for a debt-ceiling increase twice (even if it is just short-term), so we view this as an unlikely path.
4. The outlines of a deal seem to be closing in on caps on discretionary spending, permitting reforms, rescinding unobligated COVID-19 relief funds, and expanding work requirements in SNAP. Much will depend on the final details, especially in terms of the “depth” of the spending caps.
5. The deal is likely to raise the debt ceiling until 2025 and cap spending growth rates, with estimates showing $800 billion to over $3 trillion in savings over a decade depending on baseline spending year, cap growth rate, and duration of caps.
6. The Republican debt-limit bill generated $120 billion in savings from safety net programs by expanding work requirements in SNAP ($11 billion) and Medicaid ($109 billion). Republicans are seeking an expansion of existing work requirements that apply to able-bodied adults without dependents to work or attend a training program for at least 80 hours per month by increasing the age limit from 50 to 55.
7. While its uncertain whether unobligated COVID-19 relief funds will be included in a deal, the Congressional Budget Office estimates about $30 billion in budgetary savings from all the rescissions, most from the Public Health and Social Service Emergency Fund.
8. Energy permitting reforms could be important to a debt-ceiling compromise. Republicans view permitting reform as instrumental to driving economic growth. Democrats see it as an opportunity to fight climate change by making sure green energy transmission lines can get built. Importantly, House Republicans have already drafted and passed a bill focused on fossil fuels and minerals, Democratic Senator Manchin authored a similar proposal (which has the support of the President and got 47 votes in the Senate last year), and several other key Senators have introduced (or soon will introduce) legislation to resolve the remaining issues.


9. 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.