"The Perfect Storm: How the Debt-Ceiling Crisis is Adding Uncertainty to an Already Challenging Economic Environment"

 

The ongoing impasse over the US government's debt ceiling is adding uncertainty to an already challenging economic situation, according to Chicago Federal Reserve President Austan Goolsbee. In an interview with Yahoo Finance, Goolsbee noted that the debt ceiling issue is coming at the "worst possible time" as the country is still grappling with the economic aftermath of the pandemic, as well as uncertainty surrounding bank failures. The uncertainty around whether the government will be able to pay its bills adds further difficulty in assessing the conditions for economic growth and job creation.

The deadlock between House Speaker Kevin McCarthy and President Joe Biden over a deal to lift the debt limit has led to concerns that the government could run out of money as early as June 1, triggering an economic crisis. Goolsbee, who served as chairman of the Council of Economic Advisers during the 2011 debt standoff, warned that even a last-minute deal could hurt consumer confidence and cause doubt in US Treasuries. This, in turn, could lead to banking turbulence, as some lenders rely on Treasuries as collateral, and borrowing costs could rise.

While Goolsbee acknowledged that he senses a lending crunch, he stated that it is too early to determine whether to pause monetary tightening in the upcoming FOMC meeting. However, he emphasized the need for the Fed to pay attention to forthcoming data on credit conditions, which could have similar effects as higher benchmark rates. Goolsbee also noted that the impact of credit tightening would not be evenly distributed, with sectors that are more bank-dependent likely to be more directly affected.

Overall, Goolsbee emphasized the need for a resolution to the debt ceiling issue, stating that he hoped lawmakers would raise the debt ceiling and avoid a "self-inflicted wound of the most grievous kind." The uncertainty around the debt ceiling is already having an impact, with yields on short-term notes rising sharply as investors become less willing to buy Treasuries that would mature around a possible default date.