Dysfunction that knows no limits Dysfunction that knows no limits http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\capitol-building-us-small.jpg April 28 2023 January 20 2023

Dysfunction that knows no limits

Rancor aside, with ‘extraordinary measures’ the debate over the U.S. debt limit has time to be resolved.

Published January 20 2023
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Another year, another debt ceiling fiasco. In past episodes, political infighting resulted in the perception that the Treasury Department was pushed to the brink before some last minute resolution was reached. After all, crisis makes for good theater. Investors are asking if this time will be different. Does the newfound dissention within certain corners of Congress increase the odds of market disruption?

To be clear, we do not believe the U.S. government will default on its debt obligations. The public nature of the conflict may make it appear the situation is more dire than in other years. But at the end of the day, the adults in the room should preserve the sanctity of the country making good on its debt.

Treasury Secretary Janet Yellen turned the heat up on the issue sooner than expected by announcing yesterday that Treasury had already hit the $31.4 trillion debt limit and had begun the process of operating with the use of “extraordinary measures.” This is nothing new. It has done so in previous standoffs with actions such as suspending investment in some federal retirement funds. Yellen likely took this step now to accelerate efforts toward a resolution. She learned from late 2021 when the process got messier than it should have considering Democrats held both chambers of Congress. Yellen did, however, admit Treasury can operate at least until early June with the use of such measures. Most analysts estimate the “X-date,” when resources are exhausted, to be sometime in the third quarter. A quick resolution would be ideal, of course, but we have some time before the political brinksmanship on display right now—every day—becomes a true threat. 

Despite our view that this is ultimately more drama than danger, our job is to manage risk on behalf of our clients. We, as has the industry as a whole, have put resources and energy into contingency plans as the situation unfolds. We are watching developments carefully, especially in the liquidity space, and will communicate frequently as circumstances change—while eagerly awaiting the day this debacle is once again in the rearview mirror.

Tags Politics . Markets/Economy . Liquidity . Fixed Income .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Federated Investment Management Company