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Companies Push Prices Higher, Protecting Profits but Adding to Inflation

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Corporate profits have been bolstered by higher prices even as some of the costs of doing business have fallen in recent months.The prices of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Yet many big businesses have continued raising prices at a rapid clip.Some of the world’s biggest companies have said they do not plan to change course and will continue increasing prices or keep them at elevated levels for the foreseeable future.That strategy has cushioned corporate profits. And it could keep inflation robust, contributing to the very pressures used to justify surging prices.As a result, some economists warn, policymakers at the Federal Reserve may feel compelled to keep raising interest rates, or at least not lower them, increasing the likelihood and severity of an economic downturn.“Companies are not just maintaining margins, not just passing on cost increases, they have used it as a cover to expand margins,” Albert Edwards, a global strategist at Société Générale, said, referring to profit margins, a measure of how much businesses earn from every dollar of sales.PepsiCo, the snacks and beverage maker, has become a prime example of how large corporations have countered increased costs, and then some.Hugh Johnston, the company’s chief financial officer, said in February that PepsiCo had raised its prices by enough to buffer further cost pressures in 2023. At the end of April, the company reported that it had raised the average price across its products by 16 percent in the first three months of the year. That added to a similar size price increase in the fourth quarter of 2022 and increased its profit margin.“I don’t think our margins are going to deteriorate at all,” Mr. Johnston said in a recent interview with Bloomberg TV. “In fact, what we’ve said for the year is we’ll be at least even with 2022, and may in fact increase margins during the course of the year.”The bags of Doritos, cartons of Tropicana orange juice and bottles of Gatorade drinks sold by PepsiCo are now substantially pricier. Customers have grumbled, but they have largely kept buying. Shareholders have cheered. PepsiCo declined to comment.PepsiCo is not alone in continuing to raise prices. Other companies that sell consumer goods have also done well.The average company in the S&P 500 stock index increased its net profit margin from the end of last year, according to FactSet, a data and research firm, countering the expectations of Wall Street analysts that profit margins would decline slightly. And while margins are below their peak in 2021, analysts are forecasting that they will keep expanding in the second half of the year.For much of the past two years, most companies “had a perfectly good excuse to go ahead and raise prices,” said Samuel Rines, an economist and the managing director of Corbu, a research firm that serves hedge funds and other investors. “Everybody knew that the war in Ukraine was inflationary, that grain prices were going up, blah, blah, blah. And they just took advantage of that.”But those go-to rationales for elevating prices, he added, are now receding.The Producer Price Index, which measures the prices businesses pay for goods and services before they are sold to consumers, reached a high of 11.7 percent last spring. That rate has plunged to 2.3 percent for the 12 months through April.The Consumer Price Index, which tracks the prices of household expenditures on everything from eggs to rent, has also been falling, but at a much slower rate. In April, it dropped to 4.93 percent, from a high of 9.06 percent in June 2022. The price of carbonated drinks rose nearly 12 percent in April, over the previous 12 months.“Inflation is going to stay much higher than it needs to be, because companies are being greedy,” Mr. Edwards of Société Générale said.But analysts who distrust that explanation said there were other reasons consumer prices remained high. Since inflation spiked in the spring of 2021, some economists have made the case that as households emerged from the pandemic, demand for goods and services — whether garage doors or cruise trips — was left unsated because of lockdowns and constrained supply chains, driving prices higher.David Beckworth, a senior research fellow at the right-leaning Mercatus Center at George Mason University and a former economist for the Treasury Department, said he was skeptical that the rapid pace of price increases was “profit-led.”Corporations had some degree of cover for raising prices as consumers were peppered with news about imbalances in the economy. Yet Mr. Beckworth and others contend that those higher prices wouldn’t have been possible if people weren’t willing or able to spend more. In this analysis, stimulus payments from the government, investment gains, pay raises and the refinancing of mortgages at very low interest rates play a larger role in higher prices than corporate profit seeking.“It seems to me that many telling the profit story forget that households have to actually spend money for the story to hold,” Mr. Beckworth said. “And once you look at the huge surge in spending, it becomes inescapable to me where the causality lies.”Mr. Edwards acknowledged that government stimulus measures during the pandemic had an effect. In his eyes, this aid meant that average consumers weren’t “beaten up enough” financially to resist higher prices that might otherwise make them flinch. And, he added, this dynamic has also put the weight of inflation on poorer households “while richer ones won’t feel it as much.”The top 20 percent of households by income typically account for about 40 percent of total consumer spending. Overall spending on recreational experiences and luxuries appears to have peaked, according to credit card data from large banks, but remains robust enough for firms to keep charging more. Major cruise lines, including Royal Caribbean, have continued lifting prices as demand for cruises has increased going into the summer.Many people who are not at the top of the income bracket have had to trade down to cheaper products. As a result, several companies that cater to a broad customer base have fared better than expected, as well.McDonald’s reported that its sales increased by an average of 12.6 percent per store for the three months through March, compared with the same period last year. About 4.2 percent of that growth has come from increased traffic and 8.4 percent from higher menu prices.The company attributed the recent menu price increases to higher expenses for labor, transportation and meat. Several consumer groups have responded by pointing out that recent upticks in the cost of transportation and labor have eased.A representative for the company said in an email that the company’s strong results were not just a result of price increases but also “strong consumer demand for McDonald’s around the world.”Other corporations have found that fewer sales at higher prices have still helped them earn bigger profits: a dynamic that Mr. Rines of Corbu has coined “price over volume.”Colgate-Palmolive, which in addition to commanding a roughly 40 percent share of the global toothpaste market, also sells kitchen soap and other goods, had a standout first quarter. Its operating profit for the year through March rose 6 percent from the same period a year earlier — the result of a 12 percent increase in prices even as volume declined by 2 percent.The recent bonanza for corporate profits, however, may soon start to fizzle.Research from Glenmede Investment Management indicates there are signs that more consumers are cutting back on pricier purchases. The financial services firm estimates that households in the bottom fourth by income will exhaust whatever is collectively left of their pandemic-era savings sometime this summer.Some companies are beginning to find resistance from more price-sensitive customers. Dollar Tree reported rising sales but falling margins, as lower-income customers who tend to shop there searched for deals. Shares in the company plunged on Thursday as it cut back its profit expectations for the rest of the year. Even PepsiCo and McDonald’s have recently taken hits to their share prices as traders fear that they may not be able to keep increasing their profits.For now, though, investors appear to be relieved that corporations did as well as they did in the first quarter, which has helped keep stock prices from falling broadly.Before large companies began reporting how they did in the first three months of the year, the consensus among analysts was that earnings at companies in the S&P 500 would fall roughly 7 percent compared with the same period in 2022. Instead, according to data from FactSet, earnings are expected to have fallen around 2 percent once all the results are in.Savita Subramanian, the head of U.S. equity and quantitative strategy at Bank of America, wrote in a note that the latest quarterly reports “once again showed corporate America’s ability to preserve margins.” Her team raised overall earnings growth expectations for the rest of the year, and 2024. More

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    Why the Debt Limit Spending Cuts Likely Won’t Shake the Economy

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    With low unemployment and above-trend inflation, the economy is well positioned to absorb the modest budget cuts that President Biden and Republicans negotiated.The last time the United States came perilously close to defaulting on its debt, a Democratic president and a Republican speaker of the House cut a deal to raise the nation’s borrowing limit and tightly restrain some federal spending growth for years to come. The deal averted default, but it hindered what was already a slow recovery from the Great Recession.The debt deal that President Biden and Speaker Kevin McCarthy have agreed to in principle is less restrictive than the one President Barack Obama and Speaker John Boehner cut in 2011, centered on just two years of cuts and caps in spending. The economy that will absorb those cuts is in much better shape. As a result, economists say the agreement is unlikely to inflict the sort of lasting damage to the recovery that was caused by the 2011 debt ceiling deal — and, paradoxically, the newfound spending restraint might even help it.“For months, I had worried about a major economic fallout from the negotiations, but the macro impact appears to be negligible at best,” said Ben Harris, a former deputy Treasury secretary for economic policy who left his post earlier this year.“The most important impact is the stability that comes with having a deal,” Mr. Harris said. “Markets can function knowing that we don’t have a cataclysmic debt ceiling crisis looming.”Mr. Biden expressed confidence earlier this month that any deal would not spark an economic downturn. That was in part because growth persisted over the past two years even as pandemic aid spending expired and total federal spending fell from elevated Covid levels, helping to reduce the annual deficit by $1.7 trillion last year.Asked at a news conference at the Group of 7 summit in Japan this month if spending cuts in a budget deal would cause a recession, Mr. Biden replied: “I know they won’t. I know they won’t. Matter of fact, the fact that we were able to cut government spending by $1.7 trillion, that didn’t cause a recession. That caused growth.”The agreement in principle still must pass the House and Senate, where it is facing opposition from the most liberal and conservative members of Congress. It goes well beyond spending limits, also including new work requirements for food stamps and other government aid and an effort to speed permitting for some energy projects. But its centerpiece is limits on spending. Negotiators agreed to slight cuts to discretionary spending — outside of defense and veterans’ care — from this year to next, after factoring in some accounting adjustments. Military and veterans’ spending would increase this year to the amount requested in Mr. Biden’s budget for the 2024 fiscal year. All those programs would grow by 1 percent in the 2025 fiscal year — which is less than they were projected to.A New York Times analysis of the proposal suggests it would reduce federal spending by about $55 billion next year, compared with Congressional Budget Office forecasts, and by another $81 billion in 2025.The first back-of-the-envelope analysis of the deal’s economic impacts came from Mark Zandi, a Moody’s Analytics economist. He had previously estimated that a prolonged default could kill seven million jobs in the U.S. economy — and that a deep round of proposed Republican spending cuts would kill 2.6 million jobs.His analysis of the emerging deal was far more modest: The economy would have 120,000 fewer jobs by the end of 2024 than it would without a deal, he estimates, and the unemployment rate would be about 0.1 percent higher.President Biden expressed confidence that any deal would not spark an economic downturn.Doug Mills/The New York TimesMr. Zandi wrote on Twitter on Friday that it was “Not the greatest timing for fiscal restraint as the economy is fragile and recession risks are high.” But, he said, “it is manageable.”Other economists say the economy could actually use a mild dose of fiscal austerity right now. That is because the biggest economic problem is persistent inflation, which is being driven in part by strong consumer spending. Removing some federal spending from the economy could aid the Federal Reserve, which has been trying to get price growth under control by raising interest rates.“From a macroeconomic perspective, this deal is a small help,” said Jason Furman, a Harvard economist who was a deputy director of Mr. Obama’s National Economic Council in 2011. “The economy still needs cooling off, and this takes pressure off interest rates in accomplishing that cooling off.”“I think the Fed will welcome the help,” he said.Economists generally consider increased government spending — if it is not offset by increased tax revenues — to be a short-term boost for the economy. That’s because the government is borrowing money to pay salaries, buy equipment, cover health care and provide other services that ultimately support consumer spending and economic growth. That can particularly help lift the economy at times when consumer demand is low, such as the immediate aftermath of a recession.That was the case in 2011, when Republicans took control of the House and forced a showdown with Mr. Obama on raising the borrowing limit. The nation was slowly climbing out of the hole created by the 2008 financial crisis. The unemployment rate was 9 percent. The Federal Reserve had cut interest rates to near zero to try to stimulate growth, but many liberal economists were calling for the federal government to spend more to help bolster demand and accelerate job growth.The budget deal between Republicans and Mr. Obama — which was hammered out by Mr. Biden, who was then the vice president — did the opposite. It reduced federal discretionary spending by 4 percent in the first year after the deal compared with baseline projections. In the second year, it reduced spending by 5.5 percent compared with forecasts.Many economists have since blamed those cuts, along with too little stimulus spending at the recession’s outset, for prolonging the pain.The deal announced on Saturday contains smaller cuts. But the even bigger difference today is economic conditions. The unemployment rate is 3.4 percent. Prices are growing by more than 4 percent a year, well above the Fed’s target rate of 2 percent. Fed officials are trying to cool economic activity by making it more expensive to borrow money.Michael Feroli, a JPMorgan Chase analyst, wrote this week that the right way to assess the emerging deal was in terms of “how much less work the Fed needs to do in restraining aggregate demand because fiscal belt-tightening is now doing that job.” Mr. Feroli estimated the agreement could function as the equivalent of a quarter-point increase in interest rates, in terms of helping to restrain inflation.While the deal will only modestly affect the nation’s future deficit levels, Republicans have argued that it will help the economy by reducing the accumulation of debt. “We’re trying to bend the cost curve of the government for the American people,” Representative Patrick T. McHenry of North Carolina, one of the Republican negotiators, said this week.Still, the spending reductions from the deal will affect nondefense discretionary programs, like Head Start preschool, and the people they serve. New work requirements could choke off food and other assistance to vulnerable Americans.Many progressive Democrats warned this week that those effects will amount to their own sort of economic damage.“After inflation eats its share, flat funding will result in fewer households accessing rental assistance, fewer kids in Head Start and fewer services for seniors,” said Lindsay Owens, the executive director of the liberal Groundwork Collaborative in Washington.Catie Edmondson More

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    Yellen’s Debt Limit Warnings Went Unheeded, Leaving Her to Face Fallout

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    The Treasury secretary, who considered ways to contain the fallout of a default when she was a Fed official in 2011, had urged Democrats to raise the limit while they still had control of Congress.In the days after November’s midterm elections, Treasury Secretary Janet L. Yellen was feeling upbeat about the fact that Democrats had performed better than expected and maintained control of the Senate.But as she traveled to the Group of 20 leaders summit in Indonesia that month, she said Republicans taking control of the House posed a new threat to the U.S. economy.“I always worry about the debt ceiling,” Ms. Yellen told The New York Times in an interview on her flight from New Delhi to Bali, Indonesia, in which she urged Democrats to use their remaining time in control of Washington to lift the debt limit beyond the 2024 elections. “Any way that Congress can find to get it done, I’m all for.”Democrats did not heed Ms. Yellen’s advice. Instead, the United States has spent most of this year inching toward the brink of default as Republicans refused to raise or suspend the nation’s $31.4 trillion borrowing limit without capping spending and rolling back parts of President Biden’s agenda.Now the federal government’s cash balance has fallen below $40 billion. And on Friday, Ms. Yellen told lawmakers that the X-date — the point at which the Treasury Department runs out of enough money to pay all its bills on time — will arrive by June 5.Ms. Yellen has held her contingency plans close to the vest but signaled this week that she had been thinking about how to prepare for the worst. Speaking at a WSJ CEO Council event, the Treasury secretary laid out the difficult decisions she would face if the Treasury was forced to choose which bills to prioritize.Most market watchers expect that the Treasury Department would opt to make interest and principal payments to bondholders before paying other bills, yet Ms. Yellen would say only that she would face “very tough choices.”White House officials have refused to say if any contingency planning is underway. Early this year, Biden administration officials said they were not planning for how to prioritize payments. As the U.S. edges closer to default, the Treasury Department declined to say whether that has changed.Yet former Treasury and Federal Reserve officials said it was nearly certain that emergency plans were being devised.Christopher Campbell, who served as assistant Treasury secretary for financial institutions from 2017 to 2018, said that given the rapidly approaching X-date, “one would expect” that “there would be quiet conversations between the Treasury Department and the White House around how they would manage a technical default and perhaps prioritization of payments.”The Treasury Department has developed a default playbook from previous debt limit standoffs in 2011 and 2013. And Ms. Yellen has become quite familiar with those: During the last two significant standoffs — in 2011 and 2013 — she was a top Federal Reserve official contemplating how the central bank would try to contain fallout from a default.Ms. Yellen was briefed on the Treasury’s plans during those debates and engaged in her own contingency discussions about how to stabilize the financial system in the event that the United States could not pay all of its bills on time.According to the Fed’s transcripts, the Treasury Department did in fact plan to prioritize principal and interest payments to bondholders in the event that the X-date was breached. Although Treasury Department officials had trepidations about the idea, they had expressed to Fed officials that it could ultimately be done.Fed officials also discussed steps that they could take to stabilize money markets and to prevent failed Treasury auctions from prompting a default even if the Treasury Department was successfully paying creditors. Ms. Yellen said in both 2011 and 2013 that she was on board with plans to protect the financial system.“I expect that actions of this type might well prove unnecessary after the Treasury finally states that they do intend to pay principal and interest on time and we have finally issued our own set of policy statements,” Ms. Yellen said in 2011. “But if the stress nevertheless escalates, I’d support interventions to alleviate pressures on money market funds.”Ms. Yellen added that she was concerned about how vulnerable market infrastructure was in the event of a default and said officials should be thinking about ways to plan for a default in the future.Despite Ms. Yellen’s efforts to steer clear of the politics surrounding the debt limit, Republicans have been expressing doubts about her credibility. Haiyun Jiang/The New York Times“Given that we could face a similar situation somewhere down the road, I think it’s important for us to think about lessons learned so that we and markets will be better prepared if we face such a situation again,” Ms. Yellen said.Eric Rosengren, who was the president of the Federal Reserve Bank of Boston in 2011, said in an interview that he expected that Ms. Yellen, who is known for being rigorously prepared, was busy considering contingency plans as she did at the Fed more than a decade ago.“It would be irrational not to do some planning,” said Mr. Rosengren, adding that Ms. Yellen’s background of dealing with financial stability matters makes her well placed to be as ready as possible for the fallout of a default. “The last thing you want is to be completely unprepared and have the worst outcome.”As the debt ceiling standoff has intensified, Ms. Yellen has not been as involved in negotiations with lawmakers as her some of her predecessors.Mr. Biden tapped Shalanda Young, his budget director, and Steven J. Ricchetti, White House counselor, to lead the negotiations with House Republicans. Ms. Yellen has not attended the Oval Office meetings between Mr. Biden and Republicans.“It doesn’t look from the outside like Yellen is playing an active role in the budget negotiations,” said David Wessel, a senior economic fellow at the Brookings Institution who worked with Ms. Yellen at Brookings. “That may be that it’s not her comparative advantage, it may be that the White House wants to do it themselves, and it may be that they want to protect the credibility of Treasury predicting the X-date.”Ms. Yellen has taken a more behind the scenes role, briefing the White House on the nation’s cash reserves, calling business leaders and asking them to urge Republicans to lift the debt limit and sending increasingly regular letters to Congress warning when the federal government will be unable to pay all its bills.A White House official pointed out that Ms. Yellen has been the Biden administration’s primary messenger on the debt limit on the Sunday morning talk shows, and that she is coordinating on a daily basis with Jeffrey D. Zients, the White House chief of staff, and Lael Brainard, the director of the National Economic Council, to plot the administration’s strategy. Other officials have participated in the Oval Office meetings because the White House continues to view them as budget negotiations, the official added.The Treasury secretary also cut short a recent trip to Japan for a meeting of the Group of 7 finance ministers so she could return to Washington to deal with the debt limit.Despite Ms. Yellen’s efforts to steer clear of the politics surrounding the debt limit, Republicans have been expressing doubts about her credibility.Members of the House Freedom Caucus wrote a letter to Speaker Kevin McCarthy recently urging Republican leaders to demand that Ms. Yellen “furnish a complete justification” of her earlier projection that the U.S. could run out of cash as soon as June 1. In the letter, they accused her of “manipulative timing” and suggested that her forecasts should not be trusted because she was wrong about how hot inflation would get.The letter that Ms. Yellen sent on Friday provided a specific deadline — June 5 — and listed the upcoming payments that the federal government is required to make and explained why the Treasury Department would be unable to cover its debts beyond that date.Representative Patrick T. McHenry, a North Carolina Republican helping to lead the negotiations, said on Friday that there have been doubts about the X-date because it has been offered as a range. That, he said, is not what Americans experience when they do not have money to pay their mortgage bills on the day that they are due.“There was some skepticism of a date range — that you can pick whatever you want,” he said. “That is not how this works.”Republicans have also been targeting some of Ms. Yellen’s most prized policy priorities in the negotiations, such as rolling back some of the $80 billion that the Internal Revenue Service received as part of last year’s Inflation Reduction Act.The White House appears prepared to return $10 billion of those funds, which are intended to bolster the agency’s ability to catch tax cheats, in exchange for preserving other programs.In an interview on NBC’s Meet the Press this week, Ms. Yellen lamented that Republicans were targeting the money.“Something that greatly concerns me is that they have even been in favor of removing funding that’s been provided to the Internal Revenue Service to crack down on tax fraud,” she said.Whenever the debt limit standoff does subside, Democrats will most likely come under renewed pressure to overhaul the laws that govern the nation’s borrowing the next time they control the White House and Congress. Fearing that a fight over the debt limit would put her in the precarious position that she now faces, Ms. Yellen said in 2021 that she supported abolishing the borrowing cap.“I believe when Congress legislates expenditures and puts in place tax policy that determines taxes, those are the crucial decisions Congress is making,” Ms. Yellen said at a House Financial Services Committee hearing. “And if to finance those spending and tax decisions it is necessary to issue additional debt, I believe it is very destructive to put the president and myself, as Treasury secretary, in a situation where we might be unable to pay the bills that result from those past decisions.” More

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    Billionaires Worth More Than the United States’ Cash Balance

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    The cash balance at the Treasury Department is now lower than the net worth of some of the world’s richest people.The Treasury Department said its cash balance fell to $38.8 billion as of Thursday, as the United States inched toward running out of cash to pay its bills.That was significantly lower than the $316 billion the department had in operating cash, which is held at the Federal Reserve Bank of New York, at the start of the month.Just how empty is the Treasury cash coffer? For comparison, $38.8 billion is on par with the gross domestic product of Bahrain and Paraguay and lower than the net worth of more than two dozen of the wealthiest people in the world. Of course, much of the assets of those billionaires are tied up in stocks, rather than liquid assets.Here is a list of people with higher net worths than the U.S. cash reserves, according to Bloomberg News’s Billionaire Index as of Thursday. (Under the news agency’s editorial policy, its billionaire owner, Michael Bloomberg, is not considered for the index. Forbes, though, estimates his net worth at $94.5 billion.)Bernard Arnault, chief executive of the luxury group LVMH: $189 billionElon Musk, chief executive of SpaceX, Tesla and Twitter: $179 billionJeff Bezos, founder and chief executive of Amazon: $139 billionBill Gates, co-founder of Microsoft: $125 billionLarry Ellison, co-founder and executive chairman of Oracle: $116 billionSteve Ballmer, investor and former chief executive of Microsoft: $113 billionLarry Page, co-founder of Google: $112 billionWarren Buffett, investor: $111 billionSergey Brin, co-founder of Google: $106 billionMark Zuckerberg, co-founder and chief executive of Facebook: $92.3 billionCarlos Slim, investor: $90.3 billionFrançoise Bettencourt Meyers, heir to the L’Oréal fortune and company board member: $87.2 billionMukesh Ambani, chairman of the energy group Reliance Industries: $83.7 billionAmancio Ortega, founder of the Inditex fashion group: $67.1 billionJim Walton, heir to the Walmart fortune: $66.6 billionRob Walton, heir to the Walmart fortune: $64.9 billionAlice Walton, heir to the Walmart fortune: $63.8 billionGautam Adani, founder and chairman of the Adani Group conglomerate: $63.4 billionJacqueline Mars, heir to and co-owner of the candy maker Mars: $61.7 billionJohn Mars, heir to and chairman of Mars: $61.7 billionZhong Shanshan, founder and chairman of the bottled-water company Nongfu Spring: $61.6 billionJulia Flesher Koch and family, heirs of the businessman David Koch: $60.6 billionCharles Koch, chief executive of the industrial conglomerate Koch Industries: $60.4 billionMichael Dell, chief executive and chairman of Dell Technologies: $53.4 billionAlain Wertheimer, co-owner and chairman of Chanel: $45.9 billionGérard Wertheimer, co-owner of Chanel: $45.9 billionGiovanni Ferrero, executive chairman of the chocolate and confectionery company Ferrero Group, and family: $43.6 billionZhang Yiming, founder and chief executive of the technology company ByteDance: $42.3 billionPhil Knight, co-founder of Nike, and family: $41.5 billionKlaus-Michael Kühne, honorary chairman and majority owner of the transport company Kuehne+Nagel: $40.9 billionFrançois Pinault, founder of the luxury group Kering: $39.6 billion More

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    Time Is Running Out for Congress to Raise the Debt Ceiling

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    With a June 5 deadline looming, there is much to be done to prevent the default that leaders of both parties said would never happen.Senator Mitch McConnell had a message for Americans growing increasingly worried that the economy is going to crash if the federal debt ceiling is not raised: Just chill.“Look, I think everybody needs to relax,” Mr. McConnell, the Kentucky Republican and minority leader with deep experience in debt limit showdowns, told reporters back home earlier this week. “Regardless of what may be said about the talks on a day-to-day basis, the president and the speaker will reach an agreement. It will ultimately pass on a bipartisan vote in both the House and the Senate. The country will not default.”That may be a case of easier said than done. While Mr. McConnell, President Biden and Speaker Kevin McCarthy have repeatedly assured Americans that there will be no default, that guarantee is looking a little shakier with little more than a week to go before the U.S. Treasury is projected to run out of cash to pay its obligations.Even if negotiators agree to a deal soon — an outcome that appeared within reach but still had not materialized as talks continued on Friday — there is still much to be done, not the least of which is winning approval in the House and Senate. That outcome is nowhere near certain given rising uneasiness — and some outright opposition — on both the right and left. At this point, no one can be absolutely certain that the United States won’t tumble over the default cliff, even if no one involved wants that to happen. Time is short.President Biden said last weekend there was a chance a default could happen. “I can’t guarantee that they wouldn’t force a default by doing something outrageous,” he told reporters. “I can’t guarantee that.”Doug Mills/The New York Times“No one can guarantee there won’t be a default, if for no other reason than the clock is ticking down here pretty quickly,” said G. William Hoagland, a longtime Republican budget guru on Capitol Hill who is now a senior vice president at the Bipartisan Policy Center. “We are on thin ice in a big way.”Negotiators got some breathing room Friday afternoon with the Treasury secretary’s announcement that the default deadline had moved four days later, to June 5. But Congress will still be hard-pressed to act by then, and the brief extension might even be counterproductive, sapping some urgency to seal a deal.“We’re within the window of being able to perform this, and we have to come to some really tough terms in these closing hours,” said Representative Patrick T. McHenry, Republican of North Carolina and a lead negotiator for Mr. McCarthy. “We’re going back on final, important matters, and it’s just not resolved.”Since the beginning of the impasse, Mr. Biden and congressional leaders have sought to tamp down concern that a default would occur, essentially saying that it was unthinkable because Congress has narrowly avoided default before. After one of the high-level meetings at the White House, Senator Chuck Schumer, the New York Democrat and majority leader, cheered the fact that all four leaders had said default was off the table.Part of their motivation in offering these constant reassurances was to bolster their own forces, calm the public and keep the financial markets from cratering as the talks wore on.But President Biden changed his tune slightly during his visit to Japan last weekend, saying for the first time that if Republicans insisted on pushing the issue to the hilt, maybe default was an option after all.“I can’t guarantee that they wouldn’t force a default by doing something outrageous,” Mr. Biden told reporters. “I can’t guarantee that.”Representative Hakeem Jeffries, the top Democrat in the House, suggested some Republicans might want a default if they could benefit from it politically.Haiyun Jiang/The New York TimesRepresentative Hakeem Jeffries, Democratic of New York and the minority leader, expressed a similar sentiment when asked this week if he could still be certain the government would not default.“Not with this group,” he said, referring to Republicans, some of whom he suspects would not mind the financial chaos resulting from a default if they thought it could help them politically in 2024.Mr. McCarthy, the House leader and a California Republican, has also stated repeatedly that there would be no default and on Friday emphasized that he believed that a positive outcome would be the result.“I’m a total optimist,” he told reporters as negotiations continued with no apparent breakthrough.One way Mr. McCarthy has said a default could be avoided is for the Senate to pass and the president to sign the measure Republicans passed in the House raising the debt limit while making steep budget cuts and rolling back other Biden administration initiatives. But that is unlikely to happen even if the Treasury runs out of money. Mr. McCarthy has also ruled out an emergency short-term suspension of the debt ceiling.Representatives Garret Graves, left, and Patrick McHenry are two of the negotiators for the Republicans.Haiyun Jiang/The New York TimesEven an agreement between House Republicans and Mr. Biden would not end the drama; in some respects, it would be just the beginning.House Republicans have a 72-hour rule for the time between when the legislation is made public and when it is to be voted on, a timeline that pushes the showdown ever closer to the Treasury’s early June deadline.Plus, with hard-right elements of the Republican conference joining progressive Democrats in expressing reservations about the deal taking shape, Mr. McCarthy and Mr. Jeffries may have to thread the needle to produce the necessary votes from both sides to win approval of the deal.Mr. McCarthy and his leadership team will have to assess extremely accurately the number of Republicans committed to voting for any final budget deal with a debt limit increase attached. Then they will need to let Mr. Jeffries know the number of votes Democrats need to produce to make sure at least 218 lawmakers will support the package.House Republicans have a 72-hour rule for the time between when the legislation is made public and when it is to be voted on, which makes the deadline to tight.Kenny Holston/The New York TimesMiscalculation could mean disaster. With the nation in a dire financial crisis in September 2008, the House stunned the Bush administration by failing to pass its bank bailout program. In a chaotic turn of events on the House floor, the measure failed as many Republicans refused to back it despite presidential pleas and some Democrats balked as well. The stock market tumbled in real time as the vote unfolded. Four days later, rattled House members came back and approved the proposal with a few changes.Some believe that it might require a similar scenario now to push the debt limit plan through Congress — a failed vote and market drop that underscores the economic consequences of a default and motivates lawmakers to act. Others would prefer it not come to that given the potentially severe ramifications of even a brief default.“I have been of the optimistic view that it wouldn’t happen, but the longer it goes on, the more likely it seems to me,” said Mr. Hoagland, the budget expert. “Time has run out for getting this done, but I am just praying a default doesn’t happen.”Luke Broadwater More

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    Debt Ceiling Crisis: How a Default Could Unfold

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    Here’s a look at what markets are expecting and planning for, and how a default might happen.The United States is inching closer to calamity, as lawmakers continue to spar over what it will take to raise the country’s $31.4 trillion debt limit.That has raised questions about what will happen if the United States does not raise its borrowing cap in time to avoid defaulting on its debt, along with how key players are preparing for that scenario and what would actually happen should the Treasury Department fail to repay its lenders.Such a situation would be unprecedented, so it’s difficult to say with certainty how it would play out. But it’s not the first time investors and policymakers have had to contemplate “what if?” and they’ve been busy updating their plans for how they think things may play out this time.While negotiators appear to be moving toward an agreement, time is short. There is no certainty that the debt limit will be lifted before June 5, when the Treasury now estimates the government will run out of cash to pay all of its bills on time, a moment known as the “X-date.”“We’ve got to be in the closing hours because of the timeline,” said Representative Patrick McHenry, a North Carolina Republican who is involved in the talks. “I don’t know if it’s in the next day or two or three, but it’s got to come together.”Big questions remain, including what could happen in the markets, how the government is planning for default and what happens if the United States runs out of cash. Here’s a look at how things could unfold.Before the X-DateFinancial markets have become more jittery as the United States moves closer to the X-date. While exuberance over the profit-boosting expectations of artificial intelligence has helped the stock market recover, fears about the debt limit persist. On Friday, the S&P 500 rose 1.3 percent, a modest gain of 0.3 percent for the week.This week, Fitch Ratings said it was placing the nation’s top AAA credit rating on review for a possible downgrade. DBRS Morningstar, another rating firm, did the same on Thursday.For now, the Treasury is still selling debt and making payments to its lenders.That has helped mollify some concerns that the Treasury won’t be able to repay debt coming due in full, as opposed to just an interest payment. That’s because the government has a regular schedule of new Treasury auctions where it sells bonds to raise fresh cash. The auctions are scheduled in a way so that the Treasury receives its new borrowed cash at the same time that it pays off its old debts.That allows the Treasury to avoid adding much to its outstanding $31.4 trillion debt load — something it can’t do right now since it enacted extraordinary measures after coming within a whisker of the debt limit on Jan. 19. And it should give the Treasury the cash it needs to avoid any disruption to payments, at least for now.This week, for example, the government sold two-year, five-year and seven-year bonds. However, that debt doesn’t “settle” — meaning the cash is delivered to the Treasury and the securities delivered to the buyers at the auction — until May 31, coinciding with three other securities coming due.More precisely, the new cash being borrowed is slightly larger than the amount coming due, with the tricky act of balancing all of the money coming in and out pointing to the Treasury’s challenge in the days and weeks ahead.When all the payments are tallied, the government ends up with a little over $20 billion of extra cash, according TD Securities.Some of that could go to the $12 billion of interest payments that the Treasury also has to pay that day. But as time goes on, and the debt limit becomes harder to avoid, the Treasury may have to postpone any incremental fund-raising, as it did during the debt limit standoff in 2015.After the X-Date, Before DefaultThe U.S. Treasury pays its debts through a federal payments system called Fedwire. Big banks hold accounts at Fedwire, and the Treasury credits those accounts with payments on its debt. These banks then pass the payments through the market’s plumbing and via clearing houses, like the Fixed Income Clearing Corporation, with the cash eventually landing in the accounts of holders from domestic retirees to foreign central banks.The Treasury could try to push off default by extending the maturity of debt coming due. Because of the way Fedwire is set up, in the unlikely event that the Treasury chooses to push out the maturity of its debt it will need to do so before 10 p.m. at the latest on the day before the debt matures, according to contingency plans laid out by the trade group Securities Industry and Financial Markets Association, or SIFMA. The group expects that if this is done, the maturity will be extended for only one day at a time.Investors are more nervous that should the government exhaust its available cash, it could miss an interest payment on its other debt. The first big test of that will come on June 15, when interest payments on notes and bonds with an original maturity of more than a year come due.Moody’s, the rating agency, has said it is most concerned about June 15 as the possible day the government could default. However, it may be helped by corporate taxes flowing into its coffers next month.The Treasury can’t delay an interest payment without default, according to SIFMA, but it could notify Fedwire by 7:30 a.m. that the payment will not be ready for the morning. It would then have until 4:30 p.m. to make the payment and avoid default.If a default is feared, SIFMA — alongside representatives from Fedwire, the banks and other industry players — has plans in place to convene up to two calls the day before a default could occur and three further calls on the day a payment is due, with each call following a similar script to update, assess and plan for what could unfold.“On the settlement, infrastructure and plumbing, I think we have a good idea of what could happen,” said Rob Toomey, head of capital markets at SIFMA. “It’s about the best we can do. When it comes to the long-term consequences, we don’t know. What we are trying to do is minimize disruption in what will be a disruptive situation.”Default and BeyondOne big question is how the United States will determine if it has actually defaulted on its debt.There are two main ways the Treasury could default: missing an interest payment on its debt, or not repaying its borrowings when the full amount becomes due.That has prompted speculation that the Treasury Department could prioritize payments to bondholders ahead of other bills. If bondholders are paid but others are not, ratings agencies are likely to rule that the United States has dodged default.But Treasury Secretary Janet L. Yellen has suggested that any missed payment will essentially amount to a default.Shai Akabas, director of economic policy at the Bipartisan Policy Center, said an early warning sign that a default was coming could arrive in the form of a failed Treasury auction. The Treasury Department will also be closely tracking its expenditures and incoming tax revenue to forecast when a missed payment could happen.At that point, Mr. Akabas said, Ms. Yellen is likely to issue a warning with the specific timing of when she predicts the United States will not be able to make all of its payments on time and announce the contingency plans she intends to pursue.For investors, they will also receive updates through industry groups tracking the key deadlines for the Treasury to notify Fedwire that it will not make a scheduled payment.A default would then set off a cascade of potential problems.Rating firms have said a missed payment would merit a downgrade of America’s debt — and Moody’s has said it will not restore its Aaa rating until the debt ceiling was no longer subject to political brinkmanship.International leaders have questioned whether the world should continue to tolerate repeated debt-ceiling crises given the integral role the United States plays in the global economy. Central bankers, politicians and economists have warned that a default would most likely tip America into a recession, leading to waves of second order effects from corporate bankruptcies to rising unemployment.But those are just some of the risks known to be lurking.“All of this is uncharted waters,” Mr. Akabas said. “There’s no playbook to go by.”Luke Broadwater More

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    Consumer Spending Rose More Than Expected in April

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    New data on spending and income suggest that the economy remains robust despite the Federal Reserve’s interest rate increases.Americans’ income and spending both rose in April, a sign of economic resilience amid rising prices and warnings of a possible recession.Consumer spending increased 0.8 percent in April, the Commerce Department said Friday. The uptick followed a two-month slowdown in spending and exceeded forecasters’ expectations, as Americans shelled out for cars, restaurant meals, movie tickets and other goods and services.After-tax income rose 0.4 percent, fueled by a strong job market that continues to push up wages and bring more people into the work force. Data from the Labor Department this month showed that Americans in their prime working years were employed in April at the highest rate in more than two decades.Separate data released by the Commerce Department on Friday showed that a key measure of business investment also picked up in April, a sign that corporate executives aren’t expecting a major slump in demand in coming months.Consumers’ resilience is a mixed blessing for officials at the Federal Reserve, who worry that robust spending is contributing to inflation, but who also don’t want it to slow so rapidly that the economy falls into a recession. The gradual slowdown in spending seen in recent months is broadly consistent with the “soft landing” scenario that policymakers are aiming for, but they have been wary of declaring victory too soon — a concern that April’s data, which showed persistent inflation alongside stronger spending, could underscore.“The odds of a recession dropped again,” wrote Robert Frick, corporate economist with Navy Federal Credit Union, in a note to clients on Friday. “The one problem from the report is inflation remains stubbornly high, and may tempt the Fed to raise the federal funds rate even more, when a pause was on the table,” he added, referring to the upcoming meeting of policymakers in June.It is unclear how long consumers can continue to prop up the economic recovery. Savings that some households built up in the pandemic have begun to dwindle, and there are signs companies are beginning to pull back on hiring. The standoff over the debt limit could further sap the economy’s momentum, although there were signs on Thursday evening that leaders in Washington were closing in on a deal to avert a default. More

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    Fed Officials Were Split Over June Rate Pause, Minutes Show

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    In the Federal Reserve’s last meeting, “several” participants thought rates may have moved high enough to get inflation under control.Federal Reserve officials were unanimous in their decision to raise interest rates earlier this month, but were conflicted over whether additional increases would be necessary to bring inflation under control, according to minutes from the Fed’s last meeting released on Wednesday.The Fed voted to raise interest rates by a quarter-point on May 3, to a range of 5 to 5.25 percent, the 10th straight increase since the central bank started its campaign to rein in inflation last year. Although officials left the door open to further rate increases, the minutes make clear that “several” policymakers were leaning toward a pause.“Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary,” the minutes said.Still, some officials believed “additional policy firming would likely be warranted at future meetings” since progress on bringing inflation back to the central bank’s 2 percent target could continue to be “unacceptably slow.”Policymakers believed that the Fed’s moves over the past year had significantly contributed to tighter financial conditions, and they noted that labor market conditions were starting to ease. But they agreed that the labor market was still too hot, given the strong gains in job growth and an unemployment rate near historically low levels.Officials also agreed that inflation was “unacceptably high.” Although price increases have shown signs of moderating in recent months, declines were slower than officials expected, and officials were concerned that consumer spending could remain strong and keep inflation elevated. Some noted, however, that tighter credit conditions could slow household spending and dampen business investment.Fed officials believed the U.S. banking system was “sound and resilient” after the collapses of Silicon Valley Bank and Signature Bank this year led to turbulence in the banking sector. Although they noted that banks might be pulling back on lending, policymakers said it was too soon to tell how big of an impact credit tightening might have on the overall economy.One source of concern for policymakers was brinkmanship over the nation’s debt limit, which caps how much money the United States can borrow. If the cap is not raised by June 1, the Treasury Department could be unable to pay all of its bills in a timely manner, resulting in a default. Many officials said it was “essential that the debt limit be raised in a timely manner” to avoid the risk of severely damaging the economy and rattling financial markets.The central bank’s next move remains uncertain, with policymakers continuing to leave their options open ahead of their June meeting.“Whether we should hike or skip at the June meeting will depend on how the data come in over the next three weeks,” Christopher Waller, a Federal Reserve governor, said in a speech on Wednesday.The president of the Minneapolis Fed, Neel Kashkari, said in an interview with The Wall Street Journal last week that he could support holding rates steady at the June 13-14 meeting to give policymakers more time to assess how the economy is shaping up.“I’m open to the idea that we can move a little bit more slowly from here,” he said.Officials have reiterated that they will continue to monitor incoming data before reaching a decision. On Friday, the Commerce Department will release a fresh reading of the Personal Consumption Expenditures index, the Fed’s preferred gauge of inflation. Early next month, the federal government will also release new data on job growth in May. More

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    Yellen Warns of Missed Payments if Debt Limit Is Not Lifted

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    The Treasury secretary said the Biden administration would face “very tough choices” if Congress did not act.Treasury Secretary Janet L. Yellen said on Wednesday that it was “almost certain” that the United States would not have enough cash to continue to pay all of its bills on time beyond early June and that she would soon provide Congress with a more precise update about when the nation could default if the debt limit was not raised.The comments, made at a WSJ CEO Council event, came as negotiators for the White House and House Republicans raced to reach a deal to raise the debt limit and reduce government spending that Congress can pass before June 1. The Treasury secretary reiterated her warning that a default would inflict severe damage on the U.S. economy and made the case that she would be left with no good options to contain the fallout.“Treasury and President Biden will face very tough choices if Congress doesn’t act to raise the debt ceiling and if we hit the so-called X-date without that occurring,” Ms. Yellen said. “There will be some obligations that we will be unable to pay.”Ms. Yellen declined to elaborate on how exactly she would proceed if the debt limit was not lifted, but she dismissed the idea that “prioritizing” certain payments that the government was required to make would be an easy solution. She noted that government payment systems were devised to pay bills on time, not to decide which ones to pay.“Prioritization is not really something that is operationally feasible,” she said.This week, Ms. Yellen notified Congress that the federal government could run out of cash as soon as June 1. Her projections have been met with skepticism by some House Republicans, who have been calling on her to produce an analysis that details the Treasury Department’s cash reserves to prove that the deadline is real.Ms. Yellen said on Wednesday that there was considerable uncertainty associated with tracking government payments and receipts but that she planned to provide as much clarity as possible in her next update.The Treasury secretary said she was already seeing “the beginnings” of stress in financial markets due to the brinkmanship. However, she said she had not been engaging with investors about what would happen if the debt limit was not lifted.“We are committed to not having missed payments and raising the debt ceiling,” Ms. Yellen said. “We are not involved in planning for what happens if there is a default.”Despite her concerns, she said that she was hopeful the negotiations would be successful and that the Biden administration had been committed to policies that would reduce deficits.“I think a deal is possible,” Ms. Yellen said. “They’re working toward an agreement that could command bipartisan support.” More