This week, House Speaker Kevin McCarthy said he’s optimistic congressional negotiators could reach a deal to raise or suspend the debt ceiling ahead of the June 1st deadline. President Biden cut international travel short to engage in these important negotiations. The need to raise America’s debt ceiling has become a recurring discussion among US administrations.
Here’s what you need to understand in terms of how the debt ceiling negotiations and a possible stalemate impact your own wallet.
1. Social programs will likely be stalled
Even if the debt ceiling is lifted in the next two weeks, the Treasury Department might still delay — or temporarily halt — payments to millions of Americans and government agencies. Programs that could be affected include Social Security checks, Medicare disbursements, state and local government salaries, as well as military and government contractor salaries, could all be affected. If negotiations don’t go well and the debt ceiling isn’t lifted, it could be some time before these payments are reinstated. If you’re heavily dependent on these types of jobs or payments, take a close look at how you could make resources (i.e., emergency reserves) stretch through the summer months.
2. Loans could get more expensive
We’ve all been hit with increased interest rates as consumers over the past year (credit cards, student/car loans, mortgages). While the federal government can usually borrow money at a lower interest rate, because Treasury securities are viewed as safe and liquid investments, that’s dependent on how good the government is perceived to be about repaying its debts. If investors, including foreign governments who have bought US Treasuries, believe the US is having issues repaying its debt, that can cause interest rates throughout the economy to rise. Mortgage rates tied to the federal 10-year bond could rise even more, taking credit card, student and auto loan rates higher. Take a look at the loans you currently have and be prepared if they are variable rate and can increase. Be aware of loans you may need in the coming year and be prepared for higher rates – or delay those purchases. Try to minimize your personal debt now, if possible, to pay down ahead of a rate increase. If you have balances you can’t pay off, consider shifting them to intro accounts with 0% interest rates.
3. Stock prices could sink further
If the debt ceiling were to hold on June 1st, the stock markets will likely experience immediate and steep losses. These losses would likely take time to recover, even if the debt ceiling is then adjusted over the coming months. In April to August 2011, the S&P 500 tanked 31% at the height of a similar debt limit negotiation. By the end of 2011, the index had only recovered half of the ground it had lost. Firms that have a lot of exposure to government spending or contracts with the federal government, might take an additional hit. With a lot of companies’ stability in question, joblessness could rise over the already projected 4.6% unemployment rate. If the stock market starts plunging, the Fed might temporarily sideline its battle with inflation to revive the markets. There is really nothing you can do in a stock market downturn except hold steady! Do not sell. If you have a plan and a solid asset allocation, you are prepared for market volatility. Stay the course and do not panic.
Before you get too worried, just remember it’s all happened before, thanks to this debt ceiling mechanism unique to the US. In 2011 and 2013, there were significant impacts to the stock market and freezes in government spending and hiring. But the US economy did recover – eventually. The greater impacts are typically on the ratings of institutions that work with the government and the world view of the US’s finances. While we wait to see how this plays out, you can make sure you have adequate emergency reserves in relation to your level of exposure to governmental aid; delaying new loans that might become more expensive in the near-term or refinancing current debt if possible and staying invested and trying to ignore short term market fluctuations.