(Kitco News) With the debt ceiling uncertainty looming over the U.S., International Monetary Fund (IMF) managing director Kristalina Georgieva warned that a default in the U.S. would increase rates and harm American consumers.
"It will be very damaging for U.S. consumers if the U.S. defaults, that would push interest rates up," Georgieva said during an interview with CBS's 60 Minutes. "And if people don't like inflation today, they're not going to like at all what may happen tomorrow."
The alarm comes after the Treasury Department's message last month that the U.S. was bumping up against the current borrowing limit of $31.4 trillion. And if the debt ceiling is not raised, the federal government could run out of money to pay all its bills by June.
The Treasury Department already began some extraordinary measures to keep paying the government's bills in January, including suspending investments for selected government accounts.
On Monday, Yellen once again called on Congress to raise the U.S. debt limit, stating that failure to do so would trigger "an economic and financial catastrophe."
"While sometimes we've gone up to the wire, it's something that Congress has always recognized as their responsibility and needs to do again," Yellen told ABC's Good Morning America program.
In an attempt to resolve the issue, Republican U.S. House of Representatives Speaker Kevin McCarthy and President Joe Biden met last week. But the standoff continued as the two agreed to meet again.
Congressional Republicans signaled that they would like federal spending cuts in exchange for raising the limit.
However, a member of the White House's Council of Economic Advisers, Jared Bernstein, noted over the weekend that negotiations over raising the U.S. debt ceiling are an "absolute nonstarter" for President Joe Biden. He added that Biden would be willing to discuss spending with Republicans.
"The negotiation over the debt ceiling, over default, is an absolute nonstarter for this president," Bernstein told Fox News. "There is a separate set of discussions and negotiations over fiscal policy."
Federal Reserve Chair Jerome Powell said last week that no one should assume the U.S. central bank can protect the economy from default.
"No one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner," Powell said at a press conference after the Fed's latest policy meeting Wednesday. "There's only one way forward here, and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when due."
In her interview with CBS, Georgieva also added that she hopes the debt ceiling issue will be resolved in time. "If you look at history, usually after a lot of back and forth, a solution is being found," she said.
When analysts are asked what would happen if the debt ceiling is not raised in time, they take an educated guess. "That has never happened previously. To some extent, peering beyond the X date is an exercise in educated guesses and speculation," said economists at Wells Fargo.
The closest the U.S. has come to default in recent times was in the August 2011 showdown. "During that period, consumer confidence weakened significantly, and a closely watched measure of U.S. economic policy uncertainty touched what was then the highest level on record. The S&P 500 fell nearly 17% in just a few weeks, and credit spreads widened. Medium- to longer-term Treasury yields fell, but short-term Treasury security yields spiked amid worries about a default," Wells Fargo said in a report last month.
JPMorgan said in a note that heightened market volatility is expected closer to the June deadline, but these debates have ways of working themselves out.
"The impact could be economically calamitous (through a potential global recession) and disruptive for investors (for instance, through persistently higher Treasury borrowing costs)," JPMorgan said. "If history is any guide, we expect policymakers to eventually find compromise and the impact to be short-lived."
In the 2011 scenario, risk assets had a negative reaction, with the dollar selling off, stocks sinking, and credit spreads widening, JPMorgan explained.
In order to prepare, JPMorgan suggests diversification, including gold. "The potential for a disorderly debt ceiling episode adds just another kicker for global investors to rebalance U.S. overweights across asset classes," the note said. "Consider currencies and precious metals like the Japanese yen, the Swiss franc, and gold. Further, yields globally have risen, with bonds outside of the U.S. also now providing compelling income and protection."
