The debt limit caps the amount of borrowing that can occur by the federal government to pay for existing financial commitments. It doesn’t affect future spending. The Fiscal Responsibility Act of 2023, passed in June 2023, had suspended the debt limit through January 1, 2025. As of January 2, the old debt limit was in place, according to a letter that Treasury Secretary Janet Yellen sent to Speaker of the House Mike Johnson.
Yellen noted that the debt would temporarily decrease, putting off a breach until sometime between January 14 and 23, “at which time it will be necessary for Treasury to start taking extraordinary measures.”
The December continuing resolution will keep the federal government running until March 14, 2025. But that’s separate from the debt ceiling, Fitch noted. The firm does expect that the debt ceiling will be increased or suspended again. But not in early 2025.
Republicans did win the presidency as well as the House and Senate — the latter two on tight margins. Add the contention between different political wings of the GOP and the need to build coalitions and consensus is of critical importance. That makes passing appropriations bills by the required March 14, 2025, deadline unlikely.
The so-called X-date is the last time that extraordinary measures and cash on hand can continue to meet financial obligations. Fitch expects the date to land sometime in the summer. However, summer is also the period during which Congress will need to address appropriations bills and agreement on the 2017 tax cuts, which, without action will run out by the end of 2025.
Fitch expects that “important decisions are likely to be reached on an ad hoc, issue-by-issue basis, underscoring the U.S.’s deterioration in governance on fiscal matters over recent years.”
In 2023, Fitch downgraded the U.S. credit rating, the second time since S&P had in 2011. When Fitch lowered the score, it mentioned “deterioration” of national finances and “erosion of government, as NPR reported at the time. The wording is similar to what the rating agency is using now, although it hasn’t explicitly suggested that it would lower the U.S. rating again.
Reuters reported that in 2023, the debt ceiling showdown resulted in stocks and bonds selloffs, pushing the country close to default and hurting its credit rating. Falling bond prices mean that bond yields increase, making national debt more expensive and also increasing the risk-free portion of interest rates, making CRE credit, among other types, more expensive.
