by Alex Harding, CFA
Vice President, Equity Research
On Wednesday, days before the U.S. is projected to run out of money to pay its bills, the House passed the Fiscal Responsibility Act of 2023 in a bipartisan effort. The final vote of 314- 177 received support from 149 Republicans and 165 Democrats. With both sides making concessions, it’s not surprising to see members of each party voicing their displeasure with the deal. But, as House Minority Leader Hakeem Jeffries explained to his caucus, “In divided government, we of course cannot allow the perfect to be the enemy of the good.” The spotlight quickly shifted to the Senate where the bill was fast-tracked to a vote. Like the House, there was forceful opposition from party members on both sides. But thankfully, cooler heads prevailed with moderates carrying the vote 63-to-36.
Key Details
After months of finger-pointing, the legislation heads to President Biden for signature. The U.S. will avoid its first-ever default and raise the debt ceiling for the 79th time in U.S. history. Key provisions of the deal are listed below:
Suspension of the $31.4 trillion debt ceiling through January 1, 2025
Increase military spending by 3%
Keep nonmilitary spending next year in line with 2023 (after appropriation adjustments) and cap the increase in 2025 to 1%
Rescind $21 billion of the $80 billion-approved increase in IRS funding last year
Rescind $27 billion of unspent COVID-19 pandemic response money
Terminate the suspension of student loan payments and interest accruals by the end of August
Additional provisions covered: energy permitting, federal aid work requirements and non-binding discretionary spending caps from 2026 to 2029
Impact on the Economy
The Congressional Budget Office estimates that federal spending will be cut by $1.5 trillion over the next 10 years. Although the number sounds large, its impact on the growth of the $26 trillion U.S. economy is quite small and not enough to change the business cycle. In percentage terms, it’s estimated to detract 0.2% from U.S. gross domestic product in 2024 and 0.1% in 2025.
Impact on the Capital Markets
With the bill passed, the Treasury must raise substantial cash via bond sales to replenish their ‘checking account.’ Some investors are worried that the bond issuance will be done so rapidly that it will cause liquidity issues in the financial system. While this may lead to short-term stress in the capital markets, there are many factors at play, many of which may offset each other. In our view, the Treasury’s actions will have a similar impact to a 0.25% increase in the Fed funds rate.
The attention now shifts back to the Fed and their upcoming June meeting. With hotter-than-hoped inflation data and better-than-expected employment figures, the Fed remains on the proverbial tightrope as they try to balance several conflicting inputs.
Takeaways for the Week:
For the 79th time in U.S. history, the debt ceiling will be raised and the country will avoid its first-ever default
Upon clearing both hurdles of Congress, stocks rallied over 1.5% this week