I'm Michael Pinkerton, the Washington analyst for T. Rowe Price, where I interpret news coming out of D.C. for our investors in Baltimore.
At a high level, what are the debt deal’s implications for the U.S. economy?
We're probably looking at a fiscal drag over the next two years. What that means is fiscal spending will be a net negative for U.S. economic growth, as the bill put one-percentage-point caps on spending growth for the next two years, which is expected to be under the level of inflation and substantially lower than the prior two years.
Could the debt deal signal the potential for more bipartisan legislation?
I think this debt ceiling fight actually lays a marker in the ground that we could see a productive Congress between President Biden and Speaker McCarthy, where both sides see some incentives to get big deals done. Both President Biden, who’d like to look productive and be reelected, and Republicans who want to have some issues to go home to and say we did this as the new House majority, now you should elect a president and another House and Senate majority in 2024. So I think, politically, it creates an environment of compromise. And I think that's sort of underappreciated by a lot of Washington analysts and the market as a result of this deal.
Do you have any other takeaways that you think are underappreciated by the market?
I think my first takeaway from this saga that the market doesn't seem to fully appreciate is just how narrowly we escaped default, but also how significant it is that we're in the era of big bipartisan deals once again, where cutting spending is the norm versus increasing spending. So during the Trump era, typically you had a president who would propose budget cuts, but then at the end of negotiations, you would still see substantial budget increases because that was sort of the compromise that could be had between Democrats and Republicans in the 2017 era. We’re now entering a new era where you'll probably see those compromise spending bill agreements come to close to 1% or 2% spending increases or outright spending cuts. So we’re entering sort of a new era of modest spending growth and potentially modest austerity as well.
What are you watching next?
As the debt ceiling is no longer an issue but the budget process continues, we will keep all of our clients informed as issues in D.C. arise.
