Should markets be panicked about the debt limit? It depends who you ask. Some are sounding the alarm. Others are sanguine. As the clock is ticking on raising the debt limit, it’s not whether or not there should be panic. Rather, it’s when there should be panic.
Right now, there are still plenty of outs for the debt limit to get raised. But as the so-called “X date” nears when the Treasury runs out of extraordinary measures to pay its obligations, the alarm bells will increase.
In the biggest and most dramatic policy fight of the year, there’s a cast of characters in Washington, D.C. who will impact how things proceed. These characters and the milestones on the way towards the X date will be important measures of just how chaotic the debt limit fight will get.
The Key Players To Watch
House Speaker Kevin McCarthy (R-Calif.): The Californian doesn’t give up, but he does give in. McCarthy is now speaker. He wants to be seen as a negotiator who carries the weight of a majority of votes in the House. The challenge is that he’s seen as doing the bidding of the far-right House Freedom Caucus on the debt limit and is between a rock and a hard place if he doesn’t oblige. The onus is on him to prove to Democrats, the Senate, and some moderate Republicans that he’s a reliable negotiator.
President Joe Biden: The president has been around the block a few times. He’s just three years younger than the federal debt limit itself. He was part of the Obama Administration that saw the folly of negotiating with Republicans in 2011, leading him and others to hold firm in subsequent debt limit fights in 2013 and then again in 2021. While Democrats lost the House in the midterms, it wasn’t a “shellacking” that required a major White House pivot. Biden feels emboldened, but he’s also an institutionalist and negotiator at heart. There may be lines of communication open, especially with Senate Republicans, even if public posturing is not open to negotiation quite yet.
Senate Minority Leader Mitch McConnell (R-Ky.): The longest serving Senate leader, McConnell once said the debt limit is a “hostage that’s worth ransoming.” He’s taking a back seat for now, letting Biden and McCarthy try to work out a deal. But if those negotiations falter, the Kentuckian holds the cards to getting nine Republican votes to overcome the filibuster. What he wants for those nine votes is unclear. Several of his allies retired last year, leaving a smaller bench of Republicans willing to go along with a debt limit deal. McConnell is a fiscal conservative but he’s also an institutionalist. Default is not an option, but driving a hard bargain is.
Senate Majority Leader Chuck Schumer (D-N.Y.): The New Yorker won a game of chicken against McConnell the last time around on the debt limit. His majority grew by one from the midterms. Nothing gives Schumer more pleasure than outfoxing Republicans and he’s keen to win a political battle once again. But Democrats are contending with a challenging 2024 map, leaving several Democratic incumbents looking to burnish their independent and fiscal credentials. Schumer also represents the finance industry which is sensitive to the market impact of a looming default. There may be some wiggle room for Schumer if the brinkmanship heats up.
Treasury Secretary Janet Yellen: The ultimate institutionalist, Yellen plays a critical role in communicating the X date and the dangers of not raising the debt limit in time. She’s not a natural politician or communicator, but it’s that perceived nonpartisan ethos that gave her bipartisan credibility in the first place. Yellen is perhaps the most influential voice to advocate for bypassing the legislative process entirely and taking executive action. So far, though, she has called ideas like minting a platinum coin “a gimmick” that could impinge on the independence of the Federal Reserve, her former place of employment.
Rep. Chip Roy (R-Tex.): The hero of the far right, Roy’s stock increased after leading negotiations among the GOP holdouts in the speaker race. Roy was able to extract concessions from McCarthy, including a promise to seek “fiscal reforms” in return for voting to increase the debt limit. Roy has even hinted that McCarthy’s job is at risk if he caves on the debt limit. Roy has called for a return to fiscal year 2022 spending levels and to use the debt limit to fight back against “woke” government. He has fought once before on the House floor, he isn’t afraid to do so again.
House Ways and Means Committee Chair Jason Smith (R-Mo.): Smith is ready to channel the far-right ethos of fighting on the debt limit. The newly appointed chair of the House Ways and Means Committee is a self-described “firebrand” and “hillbilly” eager for a fight on the debt limit. Ways and Means is the committee of jurisdiction for it. Smith will be a visible messenger on McCarthy’s right flank. More importantly, Smith will be a voice to sell any outcome on the debt limit as a win for Republicans (or perhaps, not a loss for McCarthy). Smith owes his chairmanship to McCarthy, as he was able to leapfrog more experienced contenders with the endorsement of the speaker. He’s not going to throw McCarthy under the bus anytime soon.
House Budget Committee Chair Jodey Arrington (R-Tex.): Republicans want to attach spending cuts to any debt limit increase. That puts the onus on the newly elected House Budget Committee chair. Arrington is tasked with drafting a budget that cuts discretionary spending by $130 billion in fiscal year 2024. He will also play a leading role in budget-related asks with the debt limit. A Reaganesque Republican, Arrington sees the entire budget, discretionary and mandatory, as fair game for reforms. But several Republicans don’t want to touch entitlement and defense cuts, leaving Arrington walking a tightrope to find a budget that can get 218 votes. Despite the partisan divide on spending and the debt limit, Arrington isn’t a rebel rouser. He has cultivated bipartisan connections, including co-sponsoring the TRUST Act, which would create bipartisan rescue committees to come up with solutions to various trust funds at risk of insolvency.
House Financial Services Committee Chair Patrick McHenry (R-N.C.): A long-time fixture in the House GOP, but thanks to C-SPAN’s coverage of the speaker fight, everyone now knows what the young, bespectacled, and bowtied North Carolinian looks like. As a one-time chief deputy whip, McHenry played a critical role in negotiating with the speaker holdouts earlier this month. There was even talk of him becoming speaker if McCarthy faltered. Instead, he will lead the House Financial Services Committee. He knows more than most about the dangers of not raising the debt limit. He told Republicans to be “reasonable and realistic” in debt limit negotiations. Having McCarthy’s ear and broad respect among the Republican conference, McHenry will play an important role in trying to reach a resolution on the debt limit.
Senators Ted Cruz (R-Tex.) and Mike Lee (R-Utah): McConnell is letting the House Republicans take charge of debt limit negotiations, but some far-right senators don’t want to be left out of all the fun. Cruz and Lee have led debt limit fights in the past. They goaded House Republicans to fight over the debt limit in 2013 and shut down the government over funding the Affordable Care Act, with secret meetings in the basement of a Mexican restaurant to coordinate strategy. They are looking to get in the action again. Lee wrote a letter to Biden with 23 other senate signatories demanding any increase in the debt limit be matched with a commensurate spending cuts or other structural fiscal reforms.
Senators Joe Manchin (D-W.Va.), Kyrsten Sinema (I-Ariz.), and Mitt Romney (R-Utah): The three senators have led bipartisan “gangs” in the past to break the stalemate between party leaders. They all face re-election (if they run) in 2024. They all are interested in proving the much-maligned institution of the Senate can still work. They all like to tout fiscal responsibility. Manchin has eschewed Biden and the Democratic position of not negotiating on the debt limit, holding talks with McCarthy on his own. Romney introduced, with Manchin and Sinema cosponsoring, the TRUST Act. With thin margins and a seeming impasse between the two sides, there’s an opening here for another bipartisan gang to move the negotiations.
Reps. Brian Fitzpatrick (R-Pa.), Dave Joyce (R-Ohio), and Dusty Johnson (R-S.Dak.): The three House Republicans lead the Problem Solvers Caucus, Republican Governance Group, and Republican Main Street Partnership, respectively. These are governance-minded conservatives and moderates who are not as interested in the “fight” as the far-right of the GOP. They will look to provide a counterbalance to the Chip Roys of the world for McCarthy as he seeks to triangulate a negotiating position on the debt limit. They are not looking to rock the boat for McCarthy and are keen on some fiscal reforms. But there may be a limit in the face of a default. These Republicans are thinking about the mechanics of a discharge petition and what Democratic partners are available to help facilitate an agreement for it.
New York Republicans: There are 14 House Republicans representing New York and New Jersey. Half of them represent districts that Biden won in 2020. These are the GOP members who could feel the most pressure from markets to ensure a debt limit deal is made, even if it requires breaking away from Republican leadership. McCarthy can only afford five defections with Democrats on a discharge petition.
Rep. Josh Gottheimer (D-N.J.): The Democratic co-chair of the Problem Solvers Caucus, Gottheimer likes to be in the middle of negotiations. His role in facilitating a deal on infrastructure and Build Back Better in 2021 raised his profile with Democratic leadership. With close connections to the finance industry, he wants to ensure the debt limit is raised. He’s already having some discussions with moderate Republicans on a path forward. Any deal with House Republicans on a discharge petition will undoubtedly involve Gottheimer.
House Minority Leader Hakeem Jeffries (D-N.Y.): The House minority leader typically has the least power in negotiations among the four corners of congressional leadership. But Jeffries may end up being able to deliver more votes to raise the debt limit than McCarthy. He also holds the keys to whether a far-right challenge to McCarthy on a motion to vacate will receive the support of the bulk of the Democratic caucus. Jeffries isn’t interested in providing McCarthy an out, but he also is well-connected to the finance industry. If there is a way out that is defensible to the Democratic base, he could take it.
Federal Reserve Chair Jerome Powell: The Fed chair’s greatest asset is his perceived independence from political fights. An independent Fed is a credible Fed to tackle inflation. Yet Powell is facing a new test with this political fight over the debt limit coming to his doorsteps. Does the Fed accept the deposit of a platinum coin? Does the Fed buy up Treasurys to avoid the adverse impacts of a default? Powell is no stranger to debt limit fights, but from his perch atop the central bank, he will want to avoid any whiff of taking sides beyond stressing the dangers of a default. He likely won’t take actions in the interim to adjust for a potential default. But if the country is at the precipice of a default, it’ll be hard for Powell to sit on his hands and do nothing.
Former President Donald Trump: The self-described “king of debt” isn’t interested in serious fiscal reforms. He has called on Republicans to not cut entitlement spending. Rather, it’s all about the fight for this populist ex-president looking to remain relevant in the political zeitgeist. Trump’s power is the perceived ability to move the Republican base against any GOP politician who dared to disagree with him. That power is more in question now as he faces a tougher path to a third presidential nomination. But as he looks to build up his campaign, he sees the debt limit as a spot that could endear him to the right while causing pain for his institutional nemeses of Biden and McConnell.
Bipartisan Policy Center (BPC): The think tank played an important role in the debt limit crisis of 2011, providing a nonpartisan source for explaining the X date and its implications. The BPC is now the go-to source in Washington, D.C. for knowing when the X date will be reached. Some Republicans may not trust Yellen but they will be more likely to heed the estimations of outside organizations like the BPC.
The Key Dates To Watch
February 1: Powell will hold a press conference after the Federal Open Market Committee (FOMC) makes its decision on raising the federal funds rate. The rate impacts Treasurys as well as the broader economy, which then determines the receipts and outlays from the federal government. All of this impacts the X date. Powell will undoubtedly be asked about the debt limit, marking his first public comments of the year on the matter. This will provide insight into what role, if any, the central bank could play in this political fight.
February 7: Biden will deliver his State of the Union address before a joint session of Congress. The fight over the debt limit is as much a messaging battle as it is a policy one. In front of Republicans in Congress and millions of Americans tuning in, Biden could make his case for raising the debt limit without any conditions.
March: Both President Biden and House Republicans plan to release respective fiscal year 2024 budgets sometime in March. These are largely aspirational documents, but provide a baseline of where the two parties see the fiscal future. This is the chance for Republicans to coalesce around a budget that they can then seek concessions on for raising the debt limit. Alternatively, failure to get enough Republican support for a budget in March will leave GOP leadership weakened to negotiate a deal.
Mid-March: One legislative option to raise the debt limit is through a discharge petition. While Republican leadership controls the House floor, this legislative maneuver allows any rank-and-file member to bring legislation to the floor with a simple 218 majority of votes. If all Democrats and five House Republicans ban together, there would be enough votes. But the discharge petition is a complicated maneuver. All told, the process takes a minimum of 40 legislative days to complete. That’s about three months. If the X date is in mid-June, the latest that debt limit legislation can be introduced in committee is mid-March.
April 18: The X date may come in mid-June, it may not. Yellen expects extraordinary measures to last at least until early June. There’s still plenty of uncertainty about future federal receipts and outlays to reach a definitive X date. The picture will become clearer after a big month of receipts, namely, federal tax day. The strength of the federal tax returns could push out or bring forward debt limit negotiations.
October 1: There’s already chatter among House Republicans to pass a short-term debt limit suspension until the fall. This would provide Congress more time for negotiations but also align the debt limit with the beginning of fiscal year 2024 on October 1. Republicans would have more leverage in negotiating discretionary spending cuts. On the flip side, a debt limit impasse in the fall could come when the country is in a recession, putting Republicans at risk for being blamed for a weakened economy.