Debt Ceiling Vote Tonight

Major stock market indices fell slightly today as traders fretted about the chances for a solution to the debt ceiling crisis. The Dow ended the session down 135 points and the S&P 500 fell .6%. Crude oil fell after some weak economic data out of China, and gold was up modestly. Bonds rallied for the third straight session, with gains concentrated in long-term Treasuries and high-grade corporates.

Despite some minor tension in the markets, it seems clear that investors believe the federal debt ceiling crisis will be satisfactorily resolved. The Biden/McCarthy debt ceiling deal got a boost today when it passed a procedural vote advanced by the House Rules Committee. With the rules of debate over the bill set, a final House vote on the Fiscal Responsibility Act is expected tonight. The Wall Street Journal is reporting that it will likely pass, then travel to the US Senate for “quick action.”

Hence, the chances of the Treasury defaulting on its debt seem rather low. But that may not stop the credit rating agencies from downgrading the credit quality of Treasury bonds. After all, S&P downgraded US debt to AA+ during a similar political crisis back in 2011. And earlier today one of the top three agencies, Fitch, formally put the government on notice that its AAA rating is at risk. Any downgrade will likely mean the US government has to pay slightly higher interest on its debt.

Of course, the Federal Reserve is watching this crisis unfold and knows that the last thing the US economy needs is more uncertainty. In a speech today Fed Governor Philip Jefferson said, “Skipping a rate hike at the coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.” As the nominee for the post of Fed Vice Chair, his words are assumed to come from Chair Powell himself. And his sentiment was echoed by another official, Philadelphia Fed President Patrick Harker. It seems as though the Fed is signaling a temporary pause in rate hikes.