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The U.S. economy has been experiencing turbulence for quite some time, with the most recent debt ceiling crisis sparking fears of a sovereign default, a catastrophic outcome for the global economy. However, after months of stalling, the Biden administration raised the federal debt ceiling on June 3rd, just two days before the deadline and in time to avoid an economic crisis.
“Passing this budget agreement was critical. The stakes could not have been higher,” Biden stated on June 3rd after the legislation to raise the debt ceiling was signed into effect. “Nothing would have been more catastrophic,” he elaborated.
Debt Ceiling Crisis Challenging the U.S. Global Hegemony
The months-long debt ceiling crisis has undoubtedly created doubts regarding the country’s position as a global leader, especially as the nation struggles to get its debt under control. The unchecked spending of the federal government has resulted in the worst banking crisis in U.S. history, with more than three mid-size banks collapsing so far this year.
Fitch Ratings, one of the world’s biggest credit rating agencies, is currently wavering from its initial AAA rating on the U.S. government, despite the world’s largest economy pulling back in time to pass a debt ceiling resolution. Fitch Ratings currently holds the U.S. government on rating watch negative, stating, “repeated political standoffs around the debt-limit and last-minute suspensions before the x-date (when the Treasury’s cash position and extraordinary measures are exhausted) lowers confidence in governance on fiscal and debt matters.”
If the renowned credit rating agency does downgrade the U.S. economy, the stock market could spiral into another trend reversal, wiping off the marginal gains over the past weeks.
The U.S. dollar also delivered lackluster performance even after the debt ceiling crisis was averted, fanning speculations regarding the greenback’s ‘reserve currency’ status. The USD Index is up by just 600 basis points year-to-date after erasing the gains from the last year as the Fed approaches the end of its rate hike cycle.
The growing geopolitical tensions among the U.S., China, and Russia also pose negative economic connotations, as the Asian economies combined challenge the former’s position as a global leader. Tensions between Washington and Beijing could impact the U.S. recovery as the two countries have been waging an economic cold war.
Is a Soft Landing Possible?
Despite the turbulent macroeconomic conditions, the slowing economy can be perceived as good news. Even though the labor market has remained resilient, with the U.S. economy adding approximately 339,000 jobs last month, the recent banking crisis and the cooling inflation indicate a pause on the benchmark rate hikes. According to the CME group, there’s an 18.3% chance that the Federal Reserve might raise the federal funds rate in the upcoming cycle on June 14th. But an 81.7% probability has been assigned to no change in interest rates by the CME group.
Despite the falling inflation levels, strong labor market and consumer spending indicate that the U.S. is not in as bad a situation as painted, according to Goldman Sachs Chief Economist Jan Hatzius. Though the banking crisis has pressured the economic recovery, Hatzius expects the contagion to reduce GDP growth by only “four-tenths of a percentage point.”
With the job market running hot, the possibility of an economic recession is plummeting. Justin Wolfers, an economics professor at the University of Michigan, stated, “We’re running out of time for a 2023 recession …We’ve never had a recession when the labor market was running this hot. In fact, it would be absurd to use r-word at a time when we’re creating jobs at this rate.”
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