To make things worse, “it’s happening at a very sensitive time, right ahead of the holiday shopping season,” said Julia Coronado, chief economist for North America at BNP Paribas in New York.
If Social Security benefit payments are held up, “you’re talking about the immediate loss of a fairly significant chunk of income for a population that is fairly dependent on that cash flow,” she said. “You’d see an immediate pullback” in household spending.
The Fed would be hard-pressed to cushion the economy from such a budget squeeze, because it is already holding short-term interest rates near zero and buying $85 billion worth of debt securities per month to help bring long-term rates down.
“There is no way the Federal Reserve would be capable of offsetting” such a hit to the economy, said David Stockton, a senior fellow at the Peterson Institute for International Economics in Washington.
“Hitting the debt ceiling is going to have grave consequences for the U.S. economy, U.S. financial markets and global financial markets as well,” added Stockton, a former Fed official who is also a senior adviser to St. Louis-based Macroeconomic Advisers LLC.