Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Here’s a quick recap on where the economy stands as we (hopefully) enter the final innings on the 2023 debt ceiling debacle. Credit conditions are tightening. Consumers are losing confidence — even if their spending habits say otherwise — and inflation remains elevated. Jerome Powell and other Federal Reserve officials aren’t eager to lower rates as they watch for signs of cooling labor markets and consumer prices. And while there’s hope the U.S. can avoid a recession, staff economists at the central bank aren’t particularly bullish. Here’s why that matters: The possibility of an economic downshift — with no promise of relief in the form of rate cuts — will bear on how the market receives whatever deal President Joe Biden and House Speaker Kevin McCarthy broker on the debt limit. If it includes overly restrictive spending cuts, we could see a repeat of the sell-off that followed the 2011 crisis. “It was almost paradoxical, but the equity market, the S&P 500, fell after the debt ceiling passed” in 2011, Mike Reynolds, the vice president of investment strategy at Glenmede, told MM. Depending on what, if any, “austerity” measures make the cut in a debt limit package, “we do think that there could be some equity market volatility around this,” he said. For now, Wall Street’s response to the debt limit battle has been relatively narrow (much to the chagrin of certain Democrats). That could change with how final negotiations play out in the coming days, particularly now that Biden has cut short a planned trip to Australia and Papua New Guinea and elevated two top aides to close the deal. In 2011, stocks started cratering in late July — about 10 days before the Aug. 2 “X-date” — and continued falling until President Barack Obama and Republicans announced a deal on July 31. The carnage didn’t stop there, however. Two days after Obama signed the debt ceiling bill, the stock market reported its worst losses since the financial crisis as traders absorbed how the agreement – which forced major spending cuts – would hit an economy that was still stuck in the mud. On Aug. 5, S&P announced a historic decision to downgrade U.S. sovereign debt, which further pushed down equity markets. Volatility gauges surged. Major indices didn’t recover until the following year. Two big caveats: The economy is much more resilient now. The unemployment rate was nearly three times higher than it is today. Quantitative easing was still underway at the Fed. While there are signs a recession could be imminent, most expect it to be milder than the 2008 downturn. “If we do pull back from the brink, you may not see that sharp reaction that we saw in 2011,” MSCI Managing Director Andy Sparks, who heads the investment firm’s portfolio management research team, told your host. “It may be more like 2013” when markets responded more favorably. Just as importantly, while House Republican leaders are pushing for spending cuts now — something key leaders have argued could help cool inflation — they could easily backtrack if an economic contraction starts to hammer red districts, said RSM US chief economist Joe Brusuelas. Even if new spending caps are binding, “the current track of negotiations between the White House and the Congress strongly suggests that whatever caps are put in place will not constrain the ability of the fiscal authority to respond to whatever needs arise in case of recession,” he said. IT’S WEDNESDAY — As the proud namesake of a Monmouth County rest stop once said, we’re halfway there. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.
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