Government funding, debt ceiling take center stage

Summary

• About a month ago, we published a report highlighting the possibility of a federal government shutdown and debt ceiling dispute when Congress returned from its summer recess in mid-September.
• That time is now upon us, and fiscal policymakers in Washington D.C. have not yet resolved these two issues.
• As a refresher, there are two key deadlines on the horizon for government funding and the debt ceiling. Government funding runs out on September 30, and Congress needs to pass a continuing resolution (CR) by that date to avoid a federal government shutdown.
• In addition, the U.S. Treasury has been utilizing "extraordinary measures" and cash on hand to remain compliant with the debt ceiling since August 1. Slowly but surely, these measures are running out, and in the near future Treasury will no longer have enough cash to fully meet the obligations of the federal government.
• For several months now our forecast of the debt ceiling "X date", or the date on which the federal government would not have enough cash to fully meet its obligations, has fallen sometime in late October/early November.
• Our projection for the "X date" has not changed much since our previous publication. The final week of October starts on October 25, and that week through the first few days of November continues to strike us as the most likely period during which the Treasury's coffers will run dry if the debt ceiling is not increased or suspended by then.
• As we see it, there are two possible ways in which these issues get resolved. In scenario one, at least 10 Republican Senators join the Democrats to end a potential filibuster and permit a floor vote on a combined CR/debt ceiling suspension.
• In scenario two, a CR passes Congress without an attached debt ceiling increase, and then Democrats amend their previously-passed budget resolution to increase the debt ceiling without Republican support.
• In some previously contested debt ceiling disputes, the drama has been associated with lower equity prices, wider corporate bond spreads, higher short-term interest rates, lower consumer and business confidence and even a federal government credit rating downgrade.
• Furthermore, even if the debt ceiling does not cause any major disruptions, a shutdown could still weigh on the economy. The 2018-2019 federal government shutdown lasted about one month and directly subtracted 0.1 percentage point from Q4-2018 real GDP growth and 0.3 percentage point from Q1-2019 real GDP growth.
• This potential source of economic policy uncertainty also could be challenging for the Federal Reserve as its tapering discussions reach a climax in the next couple of months. If the economic recovery is threatened and/or markets are in turmoil over a government shutdown and debt ceiling dispute, the central bank may be wary of initiating a taper at such an inopportune time.
• A shutdown could also wreak havoc on the collection of critical economic data the Fed uses to guide its monetary policy decisions.

Download the full report