The Debt Ceiling ‘Deadline' Is June 1—What to Know About the Standoff and How It Could Affect Your Money

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Leaders on both sides of the political aisle appear to be coming closer to reaching an agreement on a deal that would raise the government's $31.4 trillion debt ceiling.  

They'll have to act quickly. In a recent letter to Congress, Treasury Secretary Janet Yellen confirmed that her department would be able to pay the U.S. government's bills until June 1 before risking default.

For now, both sides seem confident a deal is forthcoming.

"I think, at the end of the day, we do not have a debt default," House Speaker Kevin McCarthy told CNBC's "Squawk Box" on Wednesday morning.

Later that day, while speaking at the White House, President Joe Biden echoed the sentiment: "We're going to come together because these is no alternative," he said. "Every leader in the room understands the consequences of failure."

It's welcome news, but what has become a months-long political standoff isn't over. Here's what you need to know.

What's the debt ceiling?

The U.S. government funds much of its spending through debt issued by the Treasury. Currently, the limit on what Uncle Sam is allowed to borrow is $31.4 trillion.

That limit, also known as the debt ceiling, must be raised to cover spending that Congress has approved. This isn't unusual — the debt ceiling has been raised 45 times in the past 40 years.

So the U.S. is about to hit the debt ceiling?

Actually, we already hit it back in January. Ever since, the Treasury Department has been taking so-called "extraordinary measures" — essentially strategic short-term spending cuts — to make sure the government can still pay its bills.

Yellen estimates that these funds will last until June 1. The Congressional Budget Office says there's a "significant risk" that the government could default within the first two weeks of June if the ceiling isn't raised.

Has this sort of thing happened before?

Technicalities aside, the U.S. government has never defaulted on its debt. But this isn't the first time it's come close thanks to political stalemate.

In 2011, a Republican-controlled House demanded cuts to spending in order to agree to raise the debt ceiling. Democrats hoped to pass a "clean" increase devoid of cuts. Democratic President Barack Obama met with Republican House Speaker John Boehner to help push a deal through at the eleventh hour. Sound familiar?

In that case, a deal was reached two days before the Treasury's estimated deadline. Waiting until the last minute had some adverse consequences on the economy and markets.

"You could argue that there was a mini technical default with some payments getting delayed back in 2011, but the real issue was the first downgrade of U.S. debt by [Standard & Poor's]," says Liz Ann Sonders, managing director chief investment strategist at Charles Schwab.

The move sowed panic among investors: Following news of the downgrade, they fled the stock market, creating an 18% slide in the S&P 500.

How could the debate affect the markets—and your money?

The worst-case scenario is a default. If the parties can't reach a deal by early June, it's possible that the Treasury will run out of funds and certain payments — such as interest payments on U.S. government bonds and salary for government workers — could be suspended.

Most financial experts don't think it will come to that.

"I think the debt ceiling issue is going to be resolved," says Ed Yardeni, an economist and president of Yardeni Research. "If it goes an hour past midnight and Treasurys enter technical default, the market will tank for 1,000 or 2,000 points, get the politicians' attention. They'll pass the damn thing, and the market will rebound."

Even if the politicians reach a deal before June, expect more jumpiness in your portfolio the closer we get to the deadline.

"There's not much of a risk of a true default, just like there wasn't much risk in 2011," says Sonders. "But that doesn't mean there isn't volatility risk associated with taking it to the brink. That includes the possibility of another credit downgrade."

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