On The Money — How a federal debt default could affect you

February 6, 2023, 7:04 PM

We take a look at the ways a debt ceiling default could hit your own finances. We’ll also look at how one big bank is preparing for a default and why the 1980s are haunting the Federal Reserve.

🎬 But first, your favorite seat in the movie theater may get more expensive.

Welcome to On The Money, your guide to everything affecting your bills, bank account and bottom line. For The Hill, we’re Sylvan Lane, Aris Folley and Karl Evers-Hillstrom.

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5 ways a federal debt default could hurt Americans

Americans are getting a crash course on the country’s borrowing limit, as a high-stakes standoff on Capitol Hill dominates national attention.

Extraordinary measures the Treasury Department is taking to temporarily stave off a default are expected to give Congress until at least June to reach a deal to raise the limit.

Below are just a few of the reasons, experts say, the U.S. can’t afford to default.

  • Recession is almost certain: Recession fears have already been on the rise for months, as economists and lawmakers have paid close attention to the Federal Reserve’s ongoing interest rate hikes in response to high inflation. 

  • Inflation could lower – but at a steep price: Experts say inflation could also lower, but not in the way most would hope. Some say prices would fall as a result of a slower economy in such circumstances as demand weakens, but not if they were already hindered by shortages. 

  • Stock market takes a tumble: Stock portfolios would take a serious hit if the nation defaulted on its debt, sapping retirement accounts and draining crucial sources of revenue for major companies.

The conflict: GOP lawmakers have vowed not to vote to raise the debt ceiling without major spending cuts despite promising they would not let the U.S. default. Even so, Republicans have yet to unify behind any proposal to cut down the federal debt and are sparring over how much to cut defense spending, if at all.

At the same time, Democrats have instead pressed for a clean bill to raise the debt limit without conditions, accusing Republicans of holding the economy hostage for their partisan goals.

Aris delves further here.


Why the 1980s recession haunts the Fed

The ghost of the early 1980s recession is haunting the Federal Reserve.

With inflation still near 40-year highs and the U.S. economy slowing, the Fed’s aggressive rate hikes have fueled concerns of a central bank-induced recession akin to the one triggered by former Fed Chairman Paul Volcker during the 1980s. While Volcker’s rate shock ended two decades of rising inflation, it did so at the cost of a severe recession.

  • Fed Chairman Jerome Powell has frequently praised Volcker’s refusal to back down and channeled that persistence into his own battle with inflation.  

  • But most economists believe Powell can wage a far less costly war against rising prices, given major shifts in the economy — and Fed policy — since the days of Volcker.

“Inflation looks like it has already peaked and never got near the 14.5 percent peak reached in 1980, so the Fed will not have to raise rates as high as it did back then,” said Eric Swanson, an economics professor at the University of California, Irvine.

“We also benefit today from the experience that we gained back then: Everyone knows that inflation was high and was successfully brought down with high interest rates, so we know the Fed can do it again,” he said.

Sylvan and Riley Gutierrez McDermid explain here.


Bank of America’s Moynihan says firm is preparing for US debt default 

Bank of America CEO Brian Moynihan on Monday said the firm is preparing for the U.S. to default on its debt after surpassing its borrowing limit last month.

“We have to be prepared for that, not only in this country but in other countries around the world. You hope it doesn’t happen, but hope is not a strategy — so you prepare for it,” Moynihan told anchor Poppy Harlow on “CNN This Morning,” noting the company is preparing as it would “in a natural disaster.”

Moynihan, who runs the nation’s second-largest bank, said there’s value in lawmakers debating across the aisle over what to do about the national debt but said “everybody has to” batten down for a potential default.

Julia Mueller has more here.


Americans’ views of US economy tick up: poll 

Americans’ positive views of the United States economy remains well below half, but have ticked up slightly over the past week, according to a new CBS poll.

  • The new poll found that 33 percent of Americans think the condition of the economy is good, an increase from last week’s number of 28 percent.  

  • That comes after Friday’s blockbuster jobs report that showed the U.S. adding 517,000 jobs in December.

As the nation’s debt limit remains in limbo, more than half of Americans say that Congress should not raise the debt ceiling while 45 percent saying that it should. But when presented with the prospect of a default, 67 percent said Congress should raise the debt limit.

Lauren Sforza has more here.

Good to Know

It is once again time to take your finances into account and perhaps pay up to Big Brother at the IRS.

Thanks to the Inflation Reduction Act of 2022, the Internal Revenue Service was able to begin a free online program for those who qualify.

Other items we’re keeping an eye on:

  • Treasury Secretary Janet Yellen said she sees the possibility of “significantly” easing inflation in the U.S. economy, even as the government deals with the ramifications of reaching its borrowing limit and as economists worry about a potential recession. 

  • Google on Monday unveiled a new artificial intelligence tool called Bard, its rival product to the increasingly popular ChatGPT tool. 

  • Senate Majority Leader Charles Schumer (D-N.Y.) is facing renewed pressure from advocacy groups to prioritize antitrust bills targeting tech giants this Congress.

That’s it for today. Thanks for reading and check out The Hill’s Finance page for the latest news and coverage. We’ll see you tomorrow.

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