16.05.202311:52 Forex Analysis & Reviews: US may declare a default

US President Joe Biden, House Speaker Kevin McCarthy, and other congressional leaders are meeting this Tuesday to continue negotiations over the debt ceiling. The disagreements between the two sides were too great to result in any progress during their first meeting, so over the weekend, staff from both sides kept discussing through unofficial channels to try finding points of contact and potential compromises in order to reach a consensus.

However, the likelihood of seeing a progress is small, especially since the deadline is approaching. Biden is also set to go to Japan from May 19-21 and to Australia from May 22-24.

Biden said he is positive that there will be an agreement even if, McCarthy remains firm in his desire to tie spending cuts to the increase in the debt ceiling, whereas the president Biden continues to urge Congress to pass a clean increase before tackling the budget reduction issue.

Two weeks ago, Treasury Secretary Janet Yellen confirmed that by the beginning of June, the agency will not be able to meet all the payment obligations of the US government. This could trigger the first default in US history. This is why the debt ceiling issue must be resolved by July 1.

A default in the US will hinder the Federal Reserve's ability to set short-term interest rates. The Fed will not be able to carry out monetary policy to reduce inflation because US Treasury bonds are key in monetary policy to control inflation through interest rates. Anything that hampers the Treasury bond market can disrupt this mechanism.