U.S. debt ceiling crisis returns; Republican divisions persist, Fitch warns of policy deadlock.

Since the debt ceiling reinstated on Ranking of Global Forex DealersJanuary 2, 2025, the U.S. federal government faces severe fiscal policy challenges once more. International rating agency Fitch has warned that due to the Republican Party's slim majority in the House of Representatives and internal disputes over federal spending policy, the process to resolve the debt ceiling crisis in the U.S. may be deadlocked.

Why is the debt ceiling important?

The debt ceiling is the maximum amount that the U.S. Congress allows the federal government to borrow, currently set at $31.4 trillion. Its purpose is to enforce fiscal discipline and control the deficit. However, if the debt reaches the limit without adjustment, the U.S. government may default, causing widespread economic and financial risks affecting global markets.

In June 2023, then-President Biden signed a law suspending the debt ceiling until early 2025. But this temporary measure expired on January 2, 2025, reinstating the debt ceiling. Treasury Secretary Yellen warned that the U.S. could hit the debt ceiling by January 14, and the Treasury would have to adopt "extraordinary measures" to avoid default, offering only short-term relief.

Fitch's Concerns for the Future

Fitch noted that although Republicans successfully control both houses in the 2024 elections, internal policy disagreements make it difficult for the Trump administration to advance solutions on the debt ceiling issue. The agency stated: "The U.S. faces significant fiscal policy challenges in 2025, unlikely to be resolved quickly. Long-term procedural flaws in budgeting, combined with the Republicans' narrow majority in the House, may lead to prolonged policy gridlock."

The 2023 debt ceiling dispute brought the U.S. close to default and caused significant stock and bond market fluctuations. Fitch downgraded the U.S. credit rating that year, highlighting concerns about the capacity of U.S. fiscal governance.

Intra-party Divisions Exacerbate Deadlock

A short-term spending bill supported by Trump failed in Congress previously, as dozens of Republicans opposed the provision to suspend the debt ceiling. Although Congress later passed a short-term spending bill to avoid government shutdown, it did not include Trump's core demands, indicating the difficulty of achieving intra-party consensus and increasing barriers to advancing fiscal policy.

Financial Market Reactions

Data from S&P Global Market Intelligence shows that the cost of insuring U.S. government debt against default has started to rise this week. The credit default swap (CDS) spreads for six-month and one-year periods have widened by 3 and 4 basis points, respectively, highlighting market concerns about default risk.

Future Outlook

Despite the general market belief that U.S. policymakers will eventually reach an agreement on the debt ceiling, the process may be fraught with challenges, involving key fiscal policies such as extending the 2017 tax cuts. Fitch warns that this complex policy negotiation process reflects the deterioration of U.S. fiscal governance in recent years.

As the debt ceiling crisis continues to escalate, the international community and financial markets must closely monitor the dynamics of U.S. fiscal policy, which may have wider-than-expected impacts and profound effects on the global economy.

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