Can Congress Avert a Debt Limit Crisis?

McCarthy at his news conference
Reuters
By Yuval Rosenberg

Good Thursday evening! Attorney General Merrick Garland today appointed a special counsel to lead the Justice Department’s investigation into the handling of classified documents found at the home and former office of President Joe Biden. And we got confirmation that the budget deficit for calendar 2022 was over $1.4 trillion.

Here’s the latest on the fiscal front.

McCarthy Floats Debt Limit Talks to Avert a Crisis

House Speaker Kevin McCarthy (R-CA) indicated Thursday that Republicans may want to negotiate a deal with the White House to cut spending in exchange for an increase in the debt ceiling that averts a potentially catastrophic crisis.

"We don't want to put any fiscal problems to our economy and we won't," McCarthy said at his first weekly news conference since being elected speaker. “But fiscal problems would be continuing to do business as usual.”

McCarthy told reporters that he had raised the prospect of a negotiated deal when President Joe Biden called to congratulate him on becoming speaker. “I told him I’d like to sit down with him early and work through these challenges,” McCarthy said.

The Republican leader pointed to a two-year deal on the budget and debt limit reached in 2019 under the Trump administration and a Democratic-led House — though, as Roll Call’s Lindsey McPherson notes, that agreement involved lifting budget caps, not imposing them: “The Trump administration and Democrats agreed to avoid a $125 billion decrease in discretionary spending set to begin in fiscal 2020, with $77.4 billion in offsets, and suspend the debt ceiling through July 2021.”

And, as NPR’s Claudia Grisales points out, that 2019 deal was panned by conservatives for suspending the debt limit. In addition to that, McCarthy agreed as part of his deal with House conservatives that Republicans won’t back a debt limit hike that doesn’t also involve spending cuts or budget reforms.

Hitting the ceiling: The Treasury Department is expected to announce within days or weeks that it has bumped up against the $31.4 trillion borrowing limit for the federal government. That means that, while Treasury employs “extraordinary measures” to buy time and avert a debt default, congressional lawmakers will quickly be faced with the need to raise the federal borrowing limit. Rep. Brendan Boyle (D-PA), the top Democrat on the House Budget Committee, told MSNBC Wednesday night that the deadline for action could come as early as July or as late as September.

House Republicans have indicated that they’re looking to use the need to raise the debt limit as leverage to force Democrats to cut spending. “We’ve got to change the way we are spending money wastefully in the country, and we’re going to make sure that happens,” McCarthy told reporters. He said Republicans would protect Social Security and Medicare but would “scrutinize every single dollar spent.” House Republicans have agreed to put forth a budget resolution that reduces spending to fiscal year 2022 levels.

The White House and Democrats have rejected the idea of tying the debt limit to spending cuts. "Attempts to exploit the debt ceiling as leverage will not work," White House Press Secretary Karine Jean-Pierre said this week. "There will be no hostage-taking."

The White House has reportedly begun preparing for high-stakes negotiations. “Senior White House officials and aides from the Office of Legislative Affairs have already fanned out across the Hill, introducing themselves to freshman lawmakers and staff and zeroing in on moderate Republicans whom they imagine might be getable in a debt ceiling vote,” Politico reports, adding that the efforts are focused in particular on Republicans from districts President Joe Biden won in 2020 and those whose record suggests they might be persuadable.

Another path to avoid a crisis? Democrats are also engaged in informal talks aimed at convincing some more centrist Republicans to use a parliamentary process called a discharge petition to force a vote on raising the debt limit. Under the process, a majority of the House — 218 votes — can force a bill to come to the floor for a vote. That could allow a bipartisan group of House members to avoid any debt ceiling standoff, but it would likely require at least six Republicans to join with the 212 House Democrats.

That may not be easy —and the procedure itself wouldn’t be, either. “No discharge petition has been successful since 2015,” The Wall Street Journal notes.

The arcane process — read more about it here — can only be used on a measure that has been waiting in committee for at least 30 legislative days. Once the petition gets the signatures of a majority of members, it has to wait another nine legislative days before being brought to a vote. Given the congressional calendar, all those legislative days could take three or four months of real time. And the process has to start with a House bill, not one from the Senate. “We would already have to have an agreement in place with the Senate that they would pass it without changing even one semicolon,” the Budget Committee’s Boyle told MSNBC. Any Senate changes would require the process to start over.

The bottom line: One way or another, a dangerous standoff seems likely.

2022 Deficit Topped $1.4 Trillion, Treasury Says

The federal budget deficit for calendar year 2022 totaled $1.42 trillion, according to data released Thursday by the Treasury Department.

Treasury’s monthly report showed that the deficit for December jumped from $21 billion last year to $85 billion in 2022, a new record for the month. Receipts for the month fell by 7% from a year earlier to $455 billion. Outlays, meanwhile, grew by 6% to $540 billion.

Net interest costs for December came to $54 billion. From October through December, the first three months of fiscal year 2023, net interest costs totaled $144 billion, up from about $102 billion the prior year.

The deficit for those three months rose by 12% over the same period in 2022 to reach $421 billion — or more than $4 billion a day.

Inflation Drops to Lowest in More Than a Year

In the first deflationary reading since the early days of the Covid-19 pandemic, the headline consumer price index fell 0.1% in December on a monthly basis, the Bureau of Labor Statistics said Thursday, providing fresh hope that inflation is coming under control and could give the Federal Reserve reason to ease its campaign of interest rate hikes.

The annual inflation rate dropped for the sixth month in a row, falling from 7.1% in November to 6.5% last month, its lowest level in the last year. The core price index, which leaves out volatile food and fuel prices, also slowed, rising 5.7% on an annual basis, down from 6% in November. On a monthly basis, however, the core inflation rate rose 0.3%, slightly higher than the 0.2% rate recorded a month earlier.

The three-month average of core prices rose by just 3.1%, suggesting that the pullback in inflation is accelerating.

Big declines in the prices of televisions (down 14.4% on an annual basis), used cars (down 8.8%) and computers (down 5.8%) played a role in the overall results. Gasoline fell, too, down 2% relative to a year ago and 9.4% on a monthly basis. But price increases persisted in some sectors, including the prices of eggs (up 59.9% over the last year), heating fuel (up 41.5%) and air travel (up 28.5%).

Growing optimism: Although the annual inflation rate is still well above the Federal Reserve’s target of 2%, the December consumer price report provides more evidence that upward pressure on prices has passed its peak. "This month's report provides confirmation that the downshift in inflation pressures is becoming entrenched," Morgan Stanley analysts said in a note to clients.

While acknowledging that the outlook for prices still includes some problem areas – most notably the ongoing increase in the cost of shelter – Bloomberg’s Jonathan Levin wrote that “there can be no question that the overall inflation picture looks bright,” adding that “it’s the third report in as many months that supported that conclusion, which means it’s probably not a fluke.”

Saying “the data is clear,” President Joe Biden celebrated the report, attributing the positive developments to the policies enacted by his administration. “Even though inflation is high in major economies around the world, it is coming down in America month after month, giving families some real breathing room,” he said.

Will the Fed ease up? The Fed now faces the question of just how far it will go in its effort to clamp down on the economy. Wall Street wants the central bank to start easing its campaign as quickly as possible, and rising stock values and falling Treasury rates — the yield on the 10-year fell to 3.4% after the report was released Thursday — show that investors are betting that the Fed will pivot sooner rather than later, with a possible rate cut later in the year.

Many analysts now think that the Fed will raise its key rate by just 25 basis points at its next meeting and may stop short of hitting 5% on its benchmark rate. Some are even calling for the Fed to stop raising rates altogether, for fear of pushing a slowing economy into an unnecessary recession. “Put the sledgehammer away, Jay,” Pantheon Economics’ Ian Shepherdson tweeted Thursday, referring to Fed chief Jay Powell.

But Fed officials are warning that the war against inflation is far from over. Inflation is still well above their target, and there’s no guarantee that the recent downward trend will endure. Depending on the data, the Fed could keep pushing rates higher, albeit in smaller increments. And whether or not the Fed gets to a 5% “terminal rate,” bank officials have made it clear that they expect to hold rates at a high level until they are satisfied they have crushed the inflationary surge.

Minneapolis Fed President Neel Kashkari recently told The New York Times that although Wall Street is “culturally, institutionally, optimistic,” no one should doubt the central bank’s dedication to its mission of killing inflation, even if it causes pain for workers and investors. “They are going to lose the game of chicken, I can tell you that,” Kashkari said of those betting that the Fed would soon change its course.

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