With the possibility of the U.S. hitting its current borrowing limit of $31.4 trillion, the International Monetary Fund (IMF) managing director Kristalina Georgieva has warned of the damaging effects a U.S. default would have on American consumers. In an interview with CBS’s 60 Minutes, Georgieva stated, “It will be very damaging for U.S. consumers if the U.S. defaults, that would push interest rates up… And if people don’t like inflation today, they’re not going to like at all what may happen tomorrow.”
The Treasury Department recently announced that the U.S. was close to reaching its borrowing limit, and if the debt ceiling is not raised, the federal government could run out of money to pay all its bills by June. Treasury Secretary Janet Yellen has urged Congress to raise the debt limit, calling a failure to do so “an economic and financial catastrophe.”
Last week, U.S. House of Representatives Speaker Kevin McCarthy and President Joe Biden met to attempt to resolve the issue, but the standoff continues as the two agreed to meet again. Congressional Republicans have signaled a desire for federal spending cuts in exchange for raising the limit, but a member of the White House’s Council of Economic Advisers, Jared Bernstein, stated that the negotiation over the debt ceiling is an “absolute nonstarter” for President Biden.
Federal Reserve Chair Jerome Powell also stated that no one should assume the U.S. central bank can protect the economy from default, adding that the only solution is for Congress to raise the debt ceiling. Georgieva added in her interview that she hopes the debt ceiling issue will be resolved in time, saying, “If you look at history, usually after a lot of back and forth, a solution is being found.”
An educated guess has been made by economists on what would happen if the debt ceiling is not raised in time. In 2011, when the U.S. came close to default, consumer confidence weakened, the S&P 500 fell nearly 17%, and credit spreads widened. JPMorgan has stated that heightened market volatility is expected closer to the June deadline, but they believe that policymakers will eventually find compromise and the impact will be short-lived. To prepare, JPMorgan suggests diversification, including gold, as a way for global investors to rebalance U.S. overweights across asset classes.