The US debt ceiling limit of $3.14 trillion has been a sensational topic of the nation, promulgating faster than the inflation woes, which have taken a backseat. The latest developments in the US debt ceiling update: the US administration has reached a tentative agreement to raise the government’s debt ceiling to avert a catastrophic default.
One may expect the stock market to bask and spread its wings of success – but the stock market’s response to relief over the US debt ceiling deal has been ignorant, for the most part.
US Debt Ceiling Update: Agreement Impact On Stocks
Formally termed the ‘Fiscal Responsibility Act of 2023’, the Bill accentuates an increase to the debt ceiling of $31.4 trillion for two years – the US government will not need to negotiate or bargain for it again before the November 2024 presidential election. Released on Sunday night, the 99-page agreement is expected to be subjected to debate and scrutiny.
The serious risks associated with the US defaulting on the debt have not been considered by the stock market. Even if the bipartisan Congress approves the bill to elevate the current status of the US debt ceiling, it could take months before the financial markets move ahead of the distress and volatility.
“One of the concerns is that even when the run-up to an agreement occurs, there can be substantial distress to the financial market. We’re just seeing the dawn of stock and bond market volatility in recent days.”
– Janet Yellen, US Treasury Secretary
The stock market’s reaction to the debt ceiling deal might be redundant for now, but the markets will have to buckle up for a ‘no debt default’ because a potentially rough ride awaits them. The reason for this is that the Treasury will almost instantaneously need to chip in the cash that got burned during the extraordinary phase when it could not borrow money.
This creates more mayhem and competition for equity from investors as they weigh their options – investors may find the Treasury more lucrative than stocks. This may lead to a temporary state of dry liquidity in the stock market.
Bitcoin Price Increase After US Debt Ceiling: Could History Repeat Itself?
If the latest updates in the US debt ceiling agreement have brought a ray of hope for investors, it is for the cryptocurrency market. The treasured Bitcoin price has seen a two-week high after rising to 3.2 percent on Monday, trading around $28,182.
When the lawmakers came to an agreement to raise the debt ceiling in 2011, it was just mere hours before a devastating default could arise. Two days later, the US debt was downgraded for the first time in history, causing an imbalance in the stock market.
Recovery from the losses of the downgrade took nearly two months – and initial sell-offs till the X date (the government cannot meet its financial obligations post this), rippled into tremors into the market.
“We’ve raised the debt ceiling limit, but we’re not out of the woods yet.”
Many analysts are anticipating that the history of 2011’s US debt ceiling, could repeat itself. The Debt ceiling agreement’s impacts on stocks will prove to be volatile even after the bill is passed.
While a major credit agency might not downgrade the debt before or after the agreement to raise the ceiling, the current status of the US debt ceiling is at a standoff. And this standoff is pruning away the confidence in America’s financial system.
