2025 US Debt Ceiling Showdown

The Cost of Congressional Indecision: Stress, Disruption, and Inflation

January 09, 2025

As Congress works to forge a compromise on the US debt ceiling, the US Treasury will engage in a series of actions to forestall default, potentially until September. This report examines how a lengthy debt ceiling impasse will likely stress Treasury market auctions and general functioning, alter Fed balance sheet policy actions, and potentially raise borrowing costs for businesses.

• The red sweep (i.e., GOP control over both houses of Congress and the White House) does not guarantee smooth sailing for key pieces of legislation in 2025, including for the debt limit.
• The US Treasury will do what it legally can to forestall default through a series of actions, including extraordinary measures, drawing down its account held at the Federal Reserve (Fed), reducing sizes of Treasury bill auctions, and issuing one-off cash management bills to raise cash.
• If Congress and the president do not agree on a path for the debt ceiling before the US Treasury runs out of cash to operate the federal government, then the US will experience a sovereign debt default.
• A deal is highly likely as default would be disastrous, but the wait still comes at a cost. Avoiding default might still weigh on the US economy if a lengthy debt ceiling debate stokes ratings downgrades for US debt and higher borrowing costs.