Dire warnings about the economic chaos and catastrophe that will ensue if the debt ceiling isn't lifted soon abound. Still, markets remain rather sanguine about the Washington drama.
Don't expect that to last much longer. Analysts say Wall Street has identified its own X-date in late May, and if there is no major movement in Congress by then, they expect some major market volatility.
What's going on: The United States is running out of money, and if Congress doesn't act to raise or suspend its self-imposed borrowing limit, the country could soon default on its bills.
That's a really big deal. A default would, in the words of Treasury Secretary Janet Yellen, cause "an economic catastrophe."
A lengthy default would wipe out about 8.3 million jobs and bring unemployment 5 percentage points higher, economists at the White House said last week. Even under a shorter default, the economy would suffer the loss of about half a million jobs and the unemployment rate would rise by 0.3 percentage points, they said.
The Treasury could run out of cash and extraordinary measures to pay all government obligations as soon as June 1, according to Yellen. That's about three weeks from now.
Moody's Analytics last week said that the United States could hit its default date on June 8, significantly earlier than its previous projection of August 18. Other, more conservative estimates, put the X-date in August.
Investors don't appear to be panicking. Markets moved higher in after-hours trading Tuesday despite little progress being made towards a deal to raise the debt ceiling during an hour-long meeting between President Joe Biden and top congressional leaders. The major indexes were down slightly in pre-market trading Wednesday ahead of the CPI inflation report.
Markets react: There are a few reasons investors appear to be shrugging off this potential economic catastrophe.
First, they may not believe a default will actually happen — the debt ceiling was instituted in 1917 and since then the limit has been suspended or raised over 100 times, often with political drama attached. The debt ceiling crisis of 2011 caused Standard and Poor's to downgrade US debt for the first time in history. In 2013 the country also came within days of defaulting.
"I think in the stock market in general there's a feeling of the little boy who cried wolf: this will get solved at the last minute, which we've seen in the past," Greg Valliere, chief US policy strategist for AGF Investments told CNN Chief Business Correspondent Christine Romans on Tuesday.
"But this is different," he said. "I think the [Republican] militants in the House [of Representatives] are a new factor here and for the markets to be this sanguine to me is not warranted."
Second, investors might be taking the crisis seriously but don't know how to react to it, Gustavo Schwenkler, professor of finance at the Leavey School of Business at Santa Clara University, told me.
"There are so many ways this can go. It's not quite clear how equity markets will react to this event because it's just something that has never happened."
Markets could be displaying a delayed reaction while investors wait for more information, he added.
Wall Street's X-date: Analysts appear to be in agreement that the end of May is when investors will start to lose their cool.
Schwenkler says to expect "a lot more volatility" if debt ceiling issues don't appear resolved by the last week of May.
"You probably have another week or so" before investors get serious, Nicholas Bohnsack, president and head of portfolio strategy at Strategas, said Tuesday.
In a note last week, JPMorgan Asset Management chief global strategist David Kelly also identified the final days of May as when equity market volatility will rise.
What comes next: If Congress fails to increase or suspend the debt ceiling in time, said Kelly, expect a "major stock market meltdown."
But, he said, markets should be able to recover quickly. "It is best not to think of the debt-ceiling crisis as a potential rerun of the Great Financial Crisis," he wrote.
"Restoring confidence in the US banking system in the wake of the subprime crisis was an immensely complicated and uncertain task. By contrast, recovery from a debt-default crisis would likely start the day Congress, belatedly, suspended the debt ceiling," he added.
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