Specter of a default on the federal debt

Specter of a default on the federal debt

Today’s elections come just as U.S. growth has been showing consistent improvement, thanks in part to a congressional truce on budget fights. Previous such fights shut down the government and raised the specter of a default on the federal debt. A repeat of either could quickly damage the economic recovery.

If Democrats retain control of the Senate, the cease-fire may hold, analysts say. But it’s possible it could dissolve with a takeover that gives Republicans control of both chambers and potentially emboldens them to intensify conflicts with a lame-duck Democratic White House.

Republicans already control the House and are expected to maintain and even expand their majority in that chamber.

Addressing the prospect of Republican leadership in both chambers, Jack Ablin, chief investment officer at BMO Private Bank, said, “My sense is it will only harden the tension that’s in place.”

On the other hand, Republican control would also raise the likelihood of other actions that could ultimately benefit the economy.

Once in control, for example, Republicans could accept gridlock and pursue smaller deals on tax reform or trade authority with President Barack Obama. These deals could potentially benefit the economy in the long run, analysts note.

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