Wall Street’s next debt-limit drama

May 31, 2023

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Let’s assume that by this time next week Congress will have passed a debt-ceiling increase. Default won’t be a worry until 2025. Markets are already rejoicing.

But it could still be a bumpy summer.

The Treasury Department in the coming months will need to raise about $1 trillion in cash. The surge will come from a huge issuance of short-term debt.

Finding a home for that debt could put stress on the plumbing of the financial system and on banks in particular.

The reason for the potential turbulence, as our Victoria Guida lays out in a new story, is two-fold. It may encourage businesses to park money in U.S. debt rather than banks. It may also suck money out of the financial system by reducing the amount of reserves that lenders have access to at the Fed. It all could squeeze banks' ability to lend.

The private-sector committee that advises Treasury on borrowing recently encouraged the department to keep tabs on potential market stress as it replenishes its cash balance.

“Even if we assume that history repeats itself, and the debt limit is raised at the last minute, the current risks in the banking system will be amplified,” Morgan Stanley global chief economist Seth Carpenter, a former Treasury and Fed official, wrote in a note to clients.

It’s Wednesday — What debt-limit angles are we missing? Let us know: Zach Warmbrodt, Sam Sutton.

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Driving the day

Fed Gov. Michelle Bowman speaks at a “Fed Listens” event hosted by the Boston Fed at 8:50 a.m. … Treasury and Commerce officials testify at a Senate Banking hearing on China at 10 a.m. … White House economic adviser Heather Boushey speaks at a Peterson Institute-IMF conference at 1 p.m. … Fed Gov. Philip Jefferson talks about financial stability at the virtual International Conference on Policy Challenges for the Financial Sector at 1:30 p.m. … The Fed Beige Book will be released at 2 p.m. … The House will vote on the debt-limit deal in the evening

DEBT LIMIT FIGHT

Debt deal heads to the floor — The House is scheduled to vote on the bipartisan debt-limit increase around 8:30 p.m., after the plan survived conservative resistance at a key committee Tuesday. The plan negotiated by Speaker Kevin McCarthy faces opposition from House Freedom Caucus members and reservations among a number of Democrats.

Focus on the Senate — It’s unclear how quickly the upper chamber will act if the House is able to pass the bill tonight. There is probably sufficient bipartisan support to send it to President Joe Biden, but it would take unanimous agreement to expedite the process. Barring a deal on a speedier vote — something that might require additional votes on amendments that would likely fail but still let senators have their say — final passage could drag into June 6, according to NBC News.

Sen. Mike Lee (R-Utah) has threatened to use “every procedural tool” to fight a bill that lacked major spending cuts.

“There are a lot of things that they could still do to convince me to collapse time,” he said, according to our Burgess Everett and Daniella Diaz. “If they don’t do those things, then I might do that.”

Treasury has said it will run out of cash to pay all its bills next Monday, but it could begin taking steps to issue new debt before Biden signs the legislation.

"[W]e expect Treasury to start announcing and auctioning increased bill supply very shortly after any bill is passed by both the House & Senate,” Bank of America analysts said in a note last week. “Treasury does not need to wait for the President to sign the bill since the offering size increases and auctions can occur before settlement (the President would be required to sign a bill before the new bill supply can settle)."

On the Hill

Powell, Yellen and Chopra but no crypto vote — Our Eleanor Mueller reports that Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and CFPB Director Rohit Chopra are slated to testify at House Financial Services next month, according to a schedule circulated to aides Tuesday. The panel will also have a hearing on Treasury debt management, including its calculation of the debt-limit X-date.

What’s missing from the committee’s agenda is a vote on crypto legislation that Chair Patrick McHenry wants to advance this summer.

Crypto

CFTC official calls for new rules — Declan Harty reports that CFTC Commissioner Kristin Johnson wants the agency to consider new regulations for clearing firms that deal in cryptocurrency derivatives.

“[W]e may be exposing the most vulnerable investors — investors entering our markets with hard-earned cash from a long day's work — to platforms with higher risk management exposures and lower customer protections,” she said.

Fly Around

NLRB general counsel: Noncompetes violate the law — Reuters: “A U.S. labor board official on Tuesday said requiring workers to sign agreements not to join competing companies is usually illegal, the latest bid by government regulators to rein in the practice.”

Goldman looks to trim more jobs — FT: “Goldman Sachs is weighing a fresh round of job cuts amid a prolonged decrease in dealmaking that has hit profits at the investment bank, according to people familiar with the matter.”

JPMorgan ready to serve richest families — Bloomberg: “JPMorgan Chase & Co. has quietly built a global unit focused on catering to the ultra-wealthy and their investment firms as it looks to expand services to the world’s super-rich.”

People moves — WSJ reports that Dina Powell McCormick is leaving Goldman Sachs for BDT & MSD Partners, the merchant bank led by Goldman alumni Byron Trott and Gregg Lemkau … Bill Doerrer has been named deputy chief of staff for the Office of the National Cyber Director at the White House. He currently is White House liaison at the Treasury Department … Raymond Pham has been named the new WH liaison at Treasury. He most recently was national coalitions finance director at the Democratic National Committee. (h/t Daniel Lippman)

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