Debt Ceiling: Common Sense Prevailed

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Late on Thursday night, the U.S. Senate followed the House of Representatives in passing the deal brokered by the Biden administration and the Speaker of the House, Kevin McCarthy, and it will now go to the desk of the president to be signed, avoiding a potential global financial and economic crisis.

As we argued in our latest Thoughts on the Market (TOTM), the deal will have limited effects on economic activity over the next two years from reductions in government expenditures while helping to reduce economic and financial risks of default for, at least, two and a half years, which is not a small feat.

Furthermore, there are several mechanisms within the bill that will push Washington politicians to follow through on budget appropriations or risk further damage. However, these battles will not have the potentially disastrous consequences that a debt default would have had for the U.S. and the global economy.

In an ideal world, we would hope that we use this time wisely and put forward a long-term solution to our debt issues.

Markets and the next FOMC meeting

Markets expectations for the June FOMC (Federal Open Market Committee) meeting have been running wild. The day before the House of Representatives passed the Fiscal Responsibility Act (FRA), a.k.a., the debt ceiling bill, market bets on the next Federal Reserve (Fed) move had gone to about 70% expecting a 25- basis point increase in the fed funds rate. The day after the House of Representatives passed the bill, almost 74% of the bets were for the Fed to stay put on interest rates during the FOMC meeting in June.