Janet Yellen warns of a potential “Constitutional Crisis”

Speaking on ABC’s “This Week” on Sunday U.S. Treasury Secretary Janet Yellen said that negotiations in regards to raising or suspending the debt ceiling should not take place “with a gun to the head of the American people”. During her interview, she issued a dire warning that a failure by Congress to act on the debt ceiling would trigger a “constitutional crisis” that would also call into question the federal government’s creditworthiness.

She expressed the seriousness of the financial market's consequences if the debt ceiling is not raised by early June, when she said that, “the federal government could run short of cash to pay bills”. The Treasury Secretary adamantly expressed that “it’s Congress’s job to do it, if they failed to do it, we will have an economic and financial catastrophe that will be of our own making”.

The president will meet with the Republican House Speaker Kevin McCarthy, Republican Senate Minority Leader Mitch McConnell, and top congressional Democrats on Tuesday to discuss the issue.

The divide between legislators has become a bottomless chasm with President Biden and his Democratic constituent’s adamant that Congress should raise the debt ceiling without conditions. Democratic Senate majority leader Chuck Schumer last week began the process of preparing legislation that would suspend the government’s debt limit for two years without conditions. This was met with strong resistance by a group of 43 Republican senators who said they oppose any bill that would only raise the US debt ceiling without addressing other priorities.

This is quite different from the Republican-led House of Representatives bill that was passed last month that would raise the government’s $31.4 trillion debt ceiling by $1.5 trillion and concurrently cut approximately $4.5 trillion of government programs out of the annual budget. President Biden vowed to veto the congressional bill passed last month.

According to a Federal Reserve survey of bank loan officers, credit conditions for US businesses and households continue to tighten in the first quarter of this year. According to the survey bank loan officers believe the tightening is the direct result of the accumulating impact of the aggressive monetary policy by the Federal Reserve.

According to Reuters, “The Fed's quarterly Senior Loan Officer Opinion Survey, or SLOOS, among the first measures of sentiment across the banking sector since the recent run of bank failures, showed a net 46.0% of banks tightened terms of credit for a key category of business loans for medium and large businesses compared with 44.8% in the prior survey in January - a modest, stepwise change.”

The problems created by US banks tightening their lending standards and the divide between Democrat and Republican legislators to agree on legislation that both parties can sign off on, coupled with Wednesday’s CPI report for April create a trifecta of concerns that could exacerbate the slowing economy.

These issues were highly supportive of gold pricing which had modest gains today. As of 5:00 PM EDT, the most active June futures contract is currently trading up $3.70 and fixed at $2028.50. This modest gain comes despite fractional dollar strength with the dollar up 0.17% and the index fixed at 101.17.

Wishing you as always good trading,