The debt-ceiling crisis is adding stress at an already difficult period, Austan Goolsbee said. “This whole … argument about the debt ceiling comes at the worst possible time — worst possible time.” Even a last-second deal could cause doubt in Treasurys, he told Yahoo Finance. Loading Something is loading.
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The debt-ceiling impasse on Capitol Hill is adding uncertainty to an already troublesome set of economic conditions, Chicago Federal Reserve President Austan Goolsbee said.
“This whole … argument about the debt ceiling comes at the worst possible time — worst possible time,” he told Yahoo Finance on Monday.
“We’re trying to figure out what is a very strange business cycle coming out of the pandemic, weighing off against the tightening that’s coming from these bank failures and uncertainty. And to add on to it this uncertainty about whether the government is going to pay its bills, it just makes it extremely difficult to figure out what will be the conditions for economic growth in the job market.”
House Speaker Kevin McCarthy and President Joe Biden remain deadlocked on a deal to lift the government’s debt limit. Treasury Secretary Janet Yellen has said the government could run out of money and trigger an economic crisis as soon as June 1.
Goolsbee — having witnessed 2011’s debt standoff as the Council of Economic Advisers’ former chairman — noted that even a last-second deal severely risks hurting consumer confidence, which could stir doubt in US Treasurys.
In turn, this could reignite banking turbulence as some lenders may be dependent on Treasurys as collateral. At the same time, borrowing costs could jump.
“Let us hope they can just get past this and raise the debt ceiling, so this isn’t a self-inflicted wound of the most grievous kind,” he said.
Already, yields on short-term notes have risen drastically as investors are less willing to buy Treasurys that would mature around a possible default date.
Despite sensing a lending crunch, Goolsbee also said it was too soon to determine whether to pause monetary tightening in the next FOMC meeting.
But he emphasized that the Fed should pay attention to coming data on credit conditions, which may apply the same strain as higher benchmark rates would. However, such effects wouldn’t be distributed evenly.
“The sectors that are more bank dependent are going to be more directly affected by that kind of credit tightening,” he said.