Biden holds crucial meeting with Republicans on US debt limit impasse

President Joe Biden recently held a crucial meeting with Republican leaders to address the impasse over the US debt limit, which has far-reaching consequences on the world’s largest economy as well as the upcoming presidential election. The meeting at 4pm included Biden, House Speaker Kevin McCarthy, and Senate Republican leader Mitch McConnell. As the national debt ceiling, currently standing at US$31.4 trillion, has been a contentious issue in recent years, Republicans have pushed for spending curbs and a smaller budget deficit in exchange for raising the borrowing limit.

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McCarthy and his Republican Party have refused to agree to a debt ceiling increase without Democrats first committing to comprehensive budget cuts. Time is critical as Treasury Secretary Janet Yellen issued a stark warning that failure to reach an agreement within weeks would result in “financial and economic chaos”. As a result, hard negotiations lie ahead, and it remains uncertain when the government will run out of funds, with the Treasury predicting it could be as early as 1 June.

Should the US fail to meet all its obligations, Treasury would prioritise debt and interest payments, resulting in delays to crucial funding and potentially impacting Biden’s re-election campaign. However, with financial markets reacting negatively to uncertainty, a selloff in equity markets may catalyse action on Capitol Hill. Nancy Vanden Houten of Oxford Economics believes risks are elevated compared to previous debt limit standoffs, and notes that lawmakers are likely to try to negotiate a compromise bill if the stalemate continues.