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The US House of Representatives on Tuesday passed a bill to prevent a historic US default this month by raising the federal debt limit until early December, but experts warn that the temporary measure – a byproduct of failed negotiations for a long-term solution – only delays decisions it can hamper markets, especially if Democrats are forced to cut the terms of the president’s massive political agenda Joe Biden.

Highlights

With a vote of 219 to 206, House lawmakers on Tuesday night passed an interim bill to raise the national debt limit by $ 480 billion, giving the U.S. Treasury the ability to raise enough cash to fill. government financial obligations until about December 3. .

In a note to lawmakers on Monday, House Speaker Nancy Pelosi (D-Calif.) Said she hoped to have a “unanimous and possibly bipartisan Democratic vote,” but also acknowledged that ” tough decisions need to be made very soon “as lawmakers move to adopt a long-term debt solution, a $ 1 trillion two-party infrastructure plan and a multibillion-dollar spending program. dollars over the next two months.

Bank of America analysts said Monday that “debt limiting headaches are likely to return” when new liquidity begins to dry up in late November, as the bill’s successful passage “does nothing to help it. resolve the underlying impasse “between lawmakers.

Republicans have repeatedly promised that they will not support measures to raise the debt ceiling given the Democrats’ proposed spending on social priorities of $ 3.5 trillion. by themselves using a special budget process called reconciliation.

However, Democratic party leaders have so far balked at using reconciliation to raise the debt limit, with Senate Majority Leader Chuck Schumer calling the process “too long. , convoluted and risky “and instead insisting on a bipartite solution.

Chief critic

“This lousy deal holds America’s debt and credit hostage for another two months, and now we’re going to play this game once more – a contemptible and irresponsible act for adults who know better,” said the House Majority Leader Steny Hoyer. (D-Md.) Said Tuesday on the bedroom floor. “While it is a relief for so many workers in American companies that the threat of default is now being pushed back … this relief will surely be short-lived, as we will find ourselves here in a month, facing the same situation in which we have met for the past few weeks.

Crucial quote

“The drama is far from over,” wrote Lindsey Bell, chief investment strategist at Ally Invest, in an email Tuesday, saying the solution to the debt limit negotiations may ultimately lie in compromise in the social spending bill, which Democrats are also seeking to pass using reconciliation despite opposition from moderate party members.

Tangent

Bell warns Democrats who could propose spending cuts or higher taxes than anticipated in the spending bill to help limit debt increases going forward, two measures that would each lower growth expectations enterprises. “This would weigh on equities,” she adds, noting that “the nature and extent of the cuts will be the key to market reaction.”

Key context

Democrats and Republicans struck a temporary funding deal on Thursday, helping markets cut losses amid the uncertainty of a historic default. The deal came nearly two weeks after Treasury Secretary Janet Yellen warned the United States would face a “catastrophic” recession if lawmakers did not raise the debt ceiling by the 18th. October, tens of millions of Americans losing their Social Security and health care benefits among the potential consequences. “The mere appearance of Democrats and Republicans playing politics with the deadline was weighing on markets and forcing companies to prepare for the highly unlikely, but still possible, government default,” LPL Financial strategists wrote in a statement. Monday’s research note. The Senate passed the measure later that evening, but hopes for a long-term bipartisan solution quickly faded, with McConnell insisting that the GOP would only engage in a “traditional” conversation to raise awareness. limit if Democrats “give up their efforts to get through another reckless tax and spending of the past.”

Surprising fact

In a Monday research note, LPL Financial strategists warned that this year’s debt ceiling debacle looked a lot like a similar stalemate in 2011, in which the S&P 500 fell more than 16% in within 21 days. “This significant drop was due solely to the political error of not raising the debt ceiling in a timely manner,” argued Barry Gilbert and Lawrence Gillum of LPL. “It is likely that if Congress were to wait again until the last minute before raising or suspending the debt ceiling, the stock markets would react in the same way.”

What to watch out for

Although lawmakers managed to avert a catastrophic default this month, it is still unclear how Democrats will push to raise or suspend the debt limit on their own. Bank of America expects Democrats to ultimately not use reconciliation and instead succeed in pushing through an increase in the debt limit without Republicans blocking a vote with an obstruction, a measure McConnell blocked last month. Further, they say Democrats may invoke the “nuclear option” of last resort, an emergency measure to bypass a Republican obstruction and pass a simple majority increase.

Further reading

Senate agrees to raise debt ceiling, avoiding “catastrophic” default – for now (Forbes)

Senate passes interim bill to raise debt ceiling, but long-term solution still unclear (Forbes)

Republicans block Democratic efforts to raise debt ceiling as officials warn of economic disaster (Forbes)