Biden, McCarthy stay positive though debt deal remains elusive

House Speaker Kevin McCarthy told Republicans Tuesday that debt-limit talks still have some distance to go and pleaded with them to stay united on the party’s demands for spending cuts to avert a U.S. default.

McCarthy’s comments at a closed-door meeting for all House Republicans suggested urgency and uncertainty as Washington’s standoff over a potential U.S. default enters the end game.

Republican Rep. Ralph Norman, who was in the meeting, said McCarthy told them the two sides are “not anywhere near close” to a deal. Another person who was in the room confirmed McCarthy’s comments.

Negotiators for McCarthy and President Joe Biden are to resume talks at 11 a.m. at the Capitol with the two sides still short of an agreement and a catastrophic U.S. default drawing closer.

Before the talks, McCarthy told reporters Democrats “still want to spend more money this year than they did last year.”

“That’s the red line,” he said. But, he added, he believes a deal can be reached by June 1.

Both McCarthy and Biden signalled optimism after a meeting at the White House Monday evening that lasted more than an hour. Earlier, Treasury Secretary Janet Yellen warned it’s “highly likely” her department would run out of sufficient cash in early June and that default could come as soon as June 1.

Tuesday morning, the S&P 500 index of equities declined 0.3%. The yield on two-year Treasuries climbed for an eight straight day and reached 4.37%, the highest since March 10. The dollar was little changed against a basket of major currencies.

The current standoff over the debt ceiling has the potential to put more strain on the U.S. economy, which is already vulnerable to a recession after a series of interest-rate increases by the Federal Reserve, according to Bloomberg Economics.

But some conservative House members said Tuesday they even doubt the drama is necessary, with Rep. Chip Roy of Texas even calling it a “manufactured crisis” to force Republicans into stepping back from some demands.

“The fact is, we’re not going to default on our on our debt. That’s just completely false. We’ve got the money to do it,” Roy said. “So everybody just needs to be patient. Let us work through it.

Republicans want to slash domestic spending over as many years as possible, while Democrats have offered slimmer cuts over a couple of years. Democrats also want to include defence spending limits in any agreement.

That sets up a key tension for hawkish Republicans, who want to increase the Pentagon budget at the expense of deeper cutbacks in social spending. McCarthy said defence cuts shouldn’t be on the table.

The California Republican said he would not waive a rule that allows House lawmakers 72 hours to review legislation before a vote. Conservatives have demanded the time but it adds to the pressure to get an agreement.

Rohit Kumar, Senate Republican Leader Mitch McConnell’s chief negotiator in the 2011 debt-limit crisis and now a principal in PwC’s Washington office, said the signals from the leaders coming out of the White House meeting are “a good sign for getting a deal” and that he sees a “more than 50-50” chance of an agreement emerging in the next couple days.

Even if it takes a little longer to complete, a default is unlikely after an agreement, he said.

“Once the deal is struck, Congress always finds a way to get it done by the deadline, and if they can’t get it done by the deadline, they extend the deadline,” Kumar added.

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