Debt ceiling timeline: Deal faces key votes in Congress

State Street Global Advisors Chief Investment Strategist Michael Arone and Punchbowl Congressional Reporter Max Cohen join Yahoo Finance Live to lay out what's next for the tentative debt ceiling agreement. The deal still faces key votes in both the House and Senate, but if it passes, it could be signed later this week.

Video Transcript

- We have a tentative deal. President Biden and House Speaker Kevin McCarthy have struck an accord that would extend the US debt limit for two years. It just needs to pass both chambers of Congress by June 5. Joining now Max Cohen, Punchbowl News congressional reporter, and also with us is Michael Arone, State Street Global Advisors Spider Chief Investment Strategist. He'll be joining us for quite a little while here.

But let's get to Max first because as we know, this is not now a done deal. It is a tentative deal, although I'm seeing quite a lot of optimism being expressed by the strategists whose notes I'm reading this morning, Max, that it is, in fact, going to get through. What still needs to happen?

MAX COHEN: Sure. So as you mentioned in the opening, the House Rules Committee is the first hurdle. That bill needs to pass the committee, and there are three Republicans already on the committee who could tank this. And they've expressed some severe reservations with the bill. Those are conservative hard liners. Chip Roy, Thomas Massie and Ralph Norman, but we expect that actually to pass the Rules Committee.

Then it could go down to the House floor for a vote as soon as Wednesday. Then it goes on to the Senate, and with that, Monday, June, 5, X date, the Senate will have to pass that probably sometime late Sunday. So there are a number of hurdles, but I think that's probably an accurate read. Where we stand now, people are confident it can get through Congress and get to Biden's desk.

- Historically, here, Michael too, when we think about how the markets have typically moved on any type of debt ceiling negotiations, how does this compare to previous instances that we've seen in the past?

MICHAEL ARONE: I think what's interesting is that the market's been very calm in terms of their reaction so headed into the negotiations-- the VIX continues to remain low-- one sign of volatility. Markets continue to do reasonably well. There was a high sensitivity in terms of each move when it was going poorly early last week. Markets were off.

But as the deal took shape, markets really seemed to catch some fire or catch a positive bid. Now, I do-- I think what's interesting is back in 2011 when Obama and Boehner negotiated a deal, most of the losses came after the deal was negotiated. So it'll be interesting to see this time around if we follow the same script.

- And Max, in terms of what is in this agreement here, it doesn't seem like it is when all is said and done a huge cut to spending, right?

MAX COHEN: Well, you know, over 60 years if these spending caps are kept in place, it could lead to a $2 trillion cut in spending, when you consider the National deficit is much larger than that, I think you're right. In the grand scheme of things, it's not super significant. And keep in mind that estimate of $2 trillion over six years-- that's assuming these spending caps are kept steady for six years as you see in that graphic there.

It's only two years that it has to be kept steady for. I think that's a good analysis in that, although some of the people negotiating this wanted a huge transformational deal. This is in reality more of a limited deal, which might have come through the normal appropriations process in Congress.

MICHAEL ARONE: Max, it seems interesting that it sounds like they have the votes lined up in terms of the markets, at least, reacting that way. That's the sentiment. I guess I'm more curious about, do they have enough time, and is June 5 really the X date? It seems to be a moving target.

MAX COHEN: Yeah, I think Congress people are very confident June 5 is the X date. Janet Yellen had said as early as June 1 for a while, and then she clarified late last week said this will be June 5. Member of the Congress across both sides of the aisle are confident. I think that is legitimate. I do think they have time. One thing about Congress is when they have to move quickly, they do. And there is a very strict looming deadline, and they know they have to meet that.

The key thing is, the House passed it Wednesday. If that happens, move to the Senate. And the Senate might have some roadblocks with some senators objecting to a quick time agreement, but I do believe they will have enough time if all goes to plan. But again, it's Congress. You never know what might happen until it happens.

- Max, there was a lot of and continues to be a lot of political posturing as there does anything that takes place within the Beltway, but for this specifically, how does this change the calculus if we're to think out to next year into 2024, given that this is seen as a deal that largely favors some of the Republican talking points and the GOP talking points and initiatives that they'd like to move forward with or at least curb where Democrats have campaigned in the past. So how does this change that calculus?

MAX COHEN: Great question. I think you look at President Biden, he's running for reelection. He wants to pivot to the center. In terms of his own futures, you could say this is a positive for him. He can go out on the campaign trail next year and say, look, I worked across the aisle with the Speaker, and I cut spending. Maybe I put on work requirements. Maybe I did things which independents or Republican-leaning independents like.

But for Democrats in the House, Democrats in the Senate, they are very frustrated as you mentioned. They feel like they caved. So there's kind of an interesting dynamic here between maybe progressives, leftists in the Democratic caucus in the House and Senate, who are more aggrieved, but Biden actually might feel pretty good. This shows his dealmaking chops.

- Michael, I want to get back to the market reaction for a little bit. Initially, there were some concern that since we didn't know what the spending cuts would be, it could have an economic effect. But now, it doesn't-- for most of the estimates I've seen, it's not going to be a big hit to economic growth. Is that reassuring as well for the market in addition to a deal potentially getting done?

MICHAEL ARONE: I think it is, and I think partly the reason why the market suffered after Obama and Boehner negotiated their deal was sequestration and fiscal austerity, and so--

- Sequestration, I haven't heard that one in a while.

MICHAEL ARONE: I'm pulling it-- going way back here on a Tuesday morning after a holiday, but I think from my perspective, I think that the economic impact isn't as great as feared, but I do think that the bigger takeaway continues to be this notion that if you believe that government spending in the last few years boosted economic growth and stoked inflation, then over the next few years, it will at least be somewhat of a restraint.

So investors should expect lower than what we would have gotten in terms of economic growth as it relates to government spending , and probably, a little bit less inflation. Music to the ears of the Federal Reserve.

- Well, so further down that line, too, if you were an investor now thinking about what's the debt ceiling and where the different kind of spending allocation now moves forward for investors who, to your point earlier, they've likely looked past much of this thinking that there's going to get a deal that gets done. So now, if you're thinking about going further out and looking at where this spending is, do you rotate at all now knowing where that funding is going into?

MICHAEL ARONE: Potentially. Before the deal was negotiated, a lot of businesses that relied heavily on government contracts were underperforming the market. So I think they may get some relief, depending on the details of the deal. I think the one continued area of strength is on the defensive side of things. So both Democrats and Republicans agreed not to reduce defense spending, particularly given some of the geopolitical challenges.

China is back in the news again this morning in terms of refusing a meeting between the two defense ministers. Again, depends on whose side you listen to, but certainly, they can't seem to get on the same sideline here. And ultimately, the Ukraine Russia conflict. So it was interesting that both sides kept defense spending growing, and I think that those areas will likely continue to do reasonably well going forward.

- Yeah, although there's some chatter that Lindsey Graham wanted more spending, but that's another matter. Max, we are also glad to hopefully put this behind us, I think, safe to say. What's next in Washington? What do we have to worry about now, or is some are going to be pretty quiet?

MAX COHEN: Well, some of them might be quiet, but then we have fall, and we have the government funding. They have to pass these 12 appropriations bills on time, or we could face an automatic continuing resolution. That's one of the aspects of this bill, which really puts a lot of pressure on the government appropriators to come to a budget deal, which has not been done in Washington for a very long time.

We've operated on omnibus funding, on continuing resolutions, and they're hoping for a change to that with this new deal. So as we get into late summer and early fall, it's going to be government funding and maybe a shutdown. Who knows?

- Max Cohen, Punchbowl News, congressional reporter, and Michael Arone, from State Street Global Advisors.