The White House’s Council of Economic Advisers issued a warning earlier this month that a US debt default might precipitate a 45% decline in the stock market and lead to a severe recession similar to the Great Financial Crisis of 2008.
Treasury Secretary Janet Yellen is using up all of the department’s exceptional measures as the early June deadline for lawmakers to raise the debt limit approaches.
White House Warns: US Debt Default Risks 45%, Stock Market
Failure to negotiate a debt ceiling agreement may result in the Treasury skipping payments to Medicare, Medicaid, Social Security, and ultimately US bondholders.
The US 1-month Treasury yield has increased from its low of 3.31% last month to 5.56% due to the possibility of a debt default in mid-June.
Yet, other market indicators indicate that there are few prospects of a US debt default, with the VIX fear index for the stock market trading at low levels and the overall stock market trading close to one-year highs.
According to JPMorgan, existing credit default swaps only predict a 4% chance of a US debt default.
The White House cautioned that the stock market could drop 45% in the event that the US experiences a prolonged debt default, in which a default is not promptly corrected when it occurs.
Based on where the index traded on May 3, this would bring the S&P 500 below 2,250.
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Stock Market Plunge and Deep Recession
The CEA additionally cautioned that a severe economic contraction would result in a severe recession and that millions of people would lose their jobs.
The forecasts are based on a White House simulation of possible outcomes in the event that the US made its first debt default in 246 years.
The Fed has intensified its monetary policy since March of last year, hiking its benchmark interest rate ten times in a row in an effort to contain inflation.
The majority of respondents think the Fed’s main inflation indicator, the core Personal Consumption Expenditures index, won’t hit the 2% objective until 2025 or later, despite the NABE experts‘ expectation that inflation will continue to decline.
About half of the economists polled predict that interest rates will start to decline in the first quarter of next year and that they will remain high for the remainder of this year.
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