President Joe Biden urged his negotiators to keep pursuing a debt-limit deal after House Speaker Kevin McCarthy indicated that both sides may reach agreement as soon as this weekend to avoid a catastrophic US default.

In a call early Friday from Japan, where he’s attending the Group of Seven summit, Biden told his hand-picked negotiating team in Washington that he’s confident Congress will act in time, according to a White House official.

During the roughly 20-minute call, negotiators told Biden they were making steady progress, the official said, speaking on condition of anonymity to describe a private conversation. That reflected the optimistic takes offered hours earlier by McCarthy and Senate Majority Leader Chuck Schumer, who are making plans for votes in the coming days on a possible bipartisan deal.

Asian stocks opened higher Friday, with Japan’s Topix Index rising 0.5% for a sixth-straight day of gains and Australia’s S&P/ASX 200 Index up 0.7%.

Biden, according to a White House official, has been encouraging the talks but at the same time trying to protect his legislative accomplishments and popular programs from cuts demanded by congressional Republicans.

McCarthy and Schumer are making plans for votes in the coming days on a still-to-emerge deal.

McCarthy said that negotiators on the federal debt limit may reach an agreement in principle as soon as this weekend, lining up a vote in his chamber.

“I can see now where a deal can come together,” the California Republican told reporters Thursday at the Capitol.

US stocks also rose on the news, with the S&P 500 hitting a nine-month high, closing just shy of 4,200. The dollar closed at the highest since March, climbing against all of its developed-market peers.

In order to avoid a default, McCarthy said, the House would have to vote by next week on any compromise produced by the negotiators he and Biden named on Tuesday.

Schumer said the Senate would take up the legislation after House passage. The New York Democrat alerted senators that they may be called back to Washington to vote during next week’s planned recess.

McCarthy’s comments were his most positive response yet on the negotiations to avoid a default, which Treasury Secretary Janet Yellen has indicated could become a risk as soon as June 1.

Yet one key McCarthy ally, Financial Services Chairman Patrick McHenry, tempered expectations for a quick deal, saying the two sides are “not close to being done” with a deal.

“We have a lot more work to do,” the North Carolina Republican said after meeting with negotiators.

Republicans have been pressing for sweeping spending cuts, along with regulatory changes that Democrats have opposed. The months-long impasse between the two sides since the Treasury hit the debt limit in January has prompted increasing warnings from economists of a damaging recession if the brinkmanship continues to escalate.

Texas Republican Kay Granger, the chair of the House Appropriations Committee, said a deal is “close.”

Maryland Representative Steny Hoyer, the former Democratic leader, also expressed optimism. “I think we are going to get a deal,” he said.

The Treasury has been deploying special accounting measures since January to stay within the $31.4 trillion statutory ceiling, but those have been steadily running out.

McCarthy said that the five negotiators from the two sides are still discussing the amount of the spending cuts and the size or length of the debt-ceiling increase or suspension.

Negotiations are happening two to three times a day and there is a “structure” to the talks, he said. McCarthy also specified that he had confidence in two of the president’s chief negotiators, Shalanda Young and Steven Ricchetti.

Investors have in recent weeks been incorporating the risk of the Treasury running out of sufficient cash, demanding higher premiums on Treasury securities maturing in early June. Market participants have warned of a surge in borrowing costs and blow to equities in the event of any default, with reverberations to the global economy that could rival the 2008 crash.

What Bloomberg Economics Says...

In the scenario where a default is avoided but extended brinkmanship triggers market stress, the potential economic hit isn’t pretty:

• The short, mild recession currently expected becomes a deeper one, with an annualized GDP decline of 1.8% in the second half of 2023.
• The unemployment rate rises to 5.3% by mid-2024, versus 4.8% in our baseline.

If the Treasury is forced to cut spending to service debt, a conservative estimate would put the GDP drop at 8%.

— Anna Wong, chief US economist

For the full note, click here

McCarthy told reporters he’s continuing to push for expanded work requirements to be linked to government anti-poverty benefits. That’s been a major sticking point in the talks, with progressive Democrats warning Biden not to agree to changes.

McCarthy also quipped that previous Republican House speakers John Boehner and Paul Ryan, who visited the Capitol this week, are glad they aren’t involved in the current debt-limit debate.

--With assistance from Laura Litvan, Billy House and Rita Nazareth.