Crypto News: Economics Daily: Debt faceoff

Hello, I'm Chris Anstey, a senior editor for economic policy in Boston. Today we're looking at the timeline for the US debt-limit debate. Send us feedback and tips to ecodaily@blooomberg.net or tweet to @economics. And if you aren't yet signed up to receive this newsletter, you can do so here.

The White House is mulling promoting Fed Governor Philip Jefferson to vice chair and naming a Latino candidate to an open board slot.
Australia's central bank unexpectedly resumed raising interest rates.
Underlying euro-area inflation eased and banks curbed lending, adding to the case for a smaller rate hike by the European Central Bank.

Treasury Secretary Janet Yellen's new warning over the need for Congress to raise the federal debt limit has kick-started the next stage in what many expect to be a damaging partisan showdown over the issue.

Yellen on Monday afternoon informed congressional leaders that, as soon as June 1, her department risks exhausting the special accounting measures it's been using since January to stay within the debt ceiling.

Up to now, Republicans and Democrats had only a vague sense when the Treasury risked running out of money. But the April tax season has come and gone, and it's clear that the intake of revenue wasn't as big as optimists were hoping for.

Going forward, distortions in parts of the bond market — which were already materializing in recent weeks — are likely to intensify. Business leaders, who've started calling for the White House to engage with Republicans in talks to find some compromise, are likely to start getting louder in their own warnings on the need for a deal.

Federal Reserve Chair Jerome Powell is also likely to be peppered with questions at his press conference Wednesday about the potential hit to the economic outlook caused by disruptions tied to the debt limit.

The new timeline already saw President Joe Biden reach out to the Republican and Democratic leaders in both congressional chambers on Monday, with a meeting eyed for May 9. But there's no indication either side is ready to step down from their demands.

Janet Yellen. Photographer: Ting Shen/Bloomberg

The GOP is insisting on spending cuts, while Biden wants a "clean" debt-limit bill, without conditions, just like his predecessor Donald Trump got more than once.

In fact, both sides may be incentivized to use unsettling language, Goldman Sachs economists Alec Phillips and Tim Krupa wrote in a note Monday.

Republicans may want to emphasize to Democrats the difficulty of passing a debt-limit bill that doesn't include significant spending cuts. Indeed, GOP Senator John Cornyn said Monday a clean debt-limit cannot pass in that chamber.
And the Biden administration may want to emphasize the risks to the economy if Congress doesn't lift or suspend the limit. Yellen has already warned of economic and financial "collapse."

But now that investors have a fresh timeline to focus on, financial turmoil could start coming to bear on the politicians. Goldman's base case is for a resolution "on the day of the deadline, plus or minus one day."

The IMF chief said China is shifting thinking about debt restructuring after getting burned by countries' unpaid debts
There's only one female US chief economist at the nearly two dozen financial institutions designated by the Fed as primary dealers.
Russia is likely to resume buying foreign currency for its reserves as soon as this month as rising oil earnings stabilize public finances.
Britain's housing shortage, snarled planning and local protectionism are dividing a nation where homeownership was once a right of passage.
Brazil's finance minister Fernando Haddad is under attack from ostensible allies in his own party.

Economists Pierpaolo Benigno and Gauti B. Eggertsson have reassessed the relationship between employment and prices in a bid to explain the post-pandemic inflation shock. In economist terms, they propose "a non-linear New Keynesian Phillips curve" to explain today's inflation problem.

They make three observations to explain why most didn't see it coming:

Because inflation expectations didn't immediately flash red, there was an assumption the 2021 inflation surge would prove transitory
Most assumed the slope of the Philips curve — or rate prices would rise as the labor market tightened — was very low
There was an assumption it was a repeat of the 1970's style supply shock

The bottom line of the paper is that the inflationary risk of allowing the labor market to tighten too much generates much greater upside risk for inflation than has been commonly thought, the economists wrote.

"The good news, in any case, is that if our theory is correct the cost of taming inflation triggered by a labor shortage, but with stable inflation expectations, can be expected to be much lower than it was in the 1970s."