To breach the contract or not to breach the contract, it’s a dilemma 🌚

Talks between President Biden and House Speaker McCarthy turned out much better than expected, with the two sides agreeing to more intensive talks on spending limits that should pave the way for an eventual debt ceiling increase; McCarthy said he sees hope of reaching an agreement "before the end of the week." possibility, and all parties agreed to avoid a possible technical default by the United States in early June.

But Republican concessions may include some caps on discretionary government spending until 2025, while clawing back unused portions of COVID-19 set-aside funds, which would be somewhat of a fiscal drag (less spending) and put pressure on GDP. Treasury will also seek to significantly replenish the working capital account, and replenishing the TGA will require liquidity to be extracted from the system (cash returned to Treasury).

A deal would avoid an embarrassing technical default, but would likely result in a fiscal drag on GDP and an immediate loss of overall liquidity.