The Odds of US Going Past Default Date Are 25% and Rising, JPMorgan Says

The Odds of US Going Past Default Date Are 25% and Rising, JPMorgan Says
© Bloomberg. Visitors outside the US Capitol building in Washington, DC, US, on Tuesday, May 23, 2023. Debt-limit negotiators will meet this morning in Washington as President Joe Biden and House Speaker Kevin McCarthy remained without an agreement to avert a catastrophic US default with time running short.

(Bloomberg) — There’s a roughly one-in-four chance that the US will hit the so-called X-date — at which the government runs out of cash — without a deal to raise the debt limit, and the odds are getting worse, according to JPMorgan Chase & Co. (NYSE:JPM)

“We still think the most likely outcome is a deal signed into law before the X-date, though we see the odds of passing that date without an increase in the ceiling at around 25% and rising,” JPMorgan chief US economist Michael Feroli said Wednesday in a note to clients.

“In this latter scenario, we think there is a very high likelihood Treasury would prioritize principal and interest payments,” he wrote. “While doing so would avoid a technical default, there would still be several adverse effects, including a likely downgrade of the US credit rating.”

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A potential deal including cuts to federal government spending could reduce US gross domestic product by 0.1% to 0.5% in 2024, depending on the details, Feroli said.

According to a popular model for monetary policy known as the Taylor rule, that would suggest the Federal Reserve needs to make one fewer quarter-point interest-rate hike in order to bring inflation down, he said.

Source: Bloomberg