Even if the US Congress and President Joe Biden reach a debt ceiling deal, if it involves cutting federal infrastructure spending, it could threaten economic growth, according to Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
(Bloomberg) — Even if the US Congress and President Joe Biden reach a debt ceiling deal, if it involves cutting federal infrastructure spending, it could threaten economic growth, according to Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
“It matters to forward-looking expectations of growth in terms of what is cut,” she told Bloomberg TV Tuesday, citing possible rollbacks related to the Inflation Reduction act and various infrastructure projects.
“Those things have been a support to growth. And if we need to take that out of the forward forecast, that is going to dampen economic growth.”
Biden is scheduled to meet House Speaker Kevin McCarthy and other congressional leaders Tuesday afternoon in a high-stakes debt ceiling meeting.
Republican leaders want promises of future spending cuts before they approve a higher ceiling, while Biden is insisting on a “clean” increase.
Treasury Secretary Janet Yellen on Sunday said there are “simply no good options” for solving the debt limit stalemate and warned of “an economic and financial catastrophe that will be of our own making.” She previously warned lawmakers that the Treasury’s ability to use special accounting maneuvers to stay within the debt limit could be exhausted as soon as June 1.
Shalett said that she was watching for what Yellen will do after she gets approval to extend borrowing.
“At what pace and what duration is she going to issue?” she said.
“Because if you are down to zero in the Treasury general account, it is very possible that in the last four months of the year, she is going to be issuing to the tune of $650 to 750 billion, which is a drain of liquidity at the same time there is a credit crunch issue where we are continuing to pursue quantitative tightening.”
Bloomberg economists including Anna Wong has said if the government defaults, the blow to the economy and markets could rival the 2008 crash.
Shalett also said that the resilience of the S&P 500 Index this year can be credited to a handful of mega-cap tech stocks even as there is “pain and suffering below the surface.” But these tech giants could be facing political dangers.
“We are at a political point — a political moment — where the tolerance for further big company consolidation does start to be debated as an antitrust issue in a way that perhaps it hasn’t been, quite frankly, for over 40 years since the Reagan administration,” she said.
“Some of government inaction is what has gotten us here. What may break the logjam may be some attempts at re-regulation.”
–With assistance from Lisa Abramowicz.
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