Yellen to visit China this week

Treasury Secretary Janet Yellen will travel to Beijing later this week for meetings with senior Chinese officials, the Treasury Department said Sunday, as the U.S. tries to ease friction between the two countries.

Yellen's trip, scheduled for Thursday to Sunday, follows a visit last month by Secretary of State Antony Blinken, who met with Chinese President Xi Jinping. President Joe Biden met with Xi in November.

"While in Beijing, Secretary Yellen will discuss with [People’s Republic of China] officials the importance for our countries — as the world’s two largest economies — to responsibly manage our relationship, communicate directly about areas of concern, and work together to address global challenges," Treasury said in a statement.

Fear of economic ‘lost decade’ hangs over world leaders in Washington

Global finance ministers and central bankers will descend on Washington in the coming days amid economic turmoil that could tip the world into recession. And they will struggle to mount a coordinated response.

The war in Ukraine, stubbornly high inflation, rising interest rates, a fragile banking system and slower growth in China are all looming threats.

There are also growing tensions among nations, with wealthy countries furiously hiking interest rates to kill soaring prices but creating crushing debt burdens in the developing world. China is competing for influence with the U.S. and the EU, which are facing their own conflicts over trade. And Russia's geopolitical role continues to sharply divide governments.

"It's going to be chaotic," said Douglas Rediker, who represented the U.S. on the board of the International Monetary Fund from 2010 to 2012.

Underscoring the budding fears, the World Bank last month warned of a looming “lost decade” for the economy that could sap momentum for fighting poverty and addressing climate change.

The expanding list of economic uncertainties will pervade next week’s spring meetings of the IMF and the World Bank just a few blocks from the White House, setting up major challenges for leaders as they grapple with food and energy constraints, severe debt loads on developing countries and global warming.

“There’s going to be a great deal of hand-wringing with the state of the global economy,” said Mark Sobel, U.S. chair at the Official Monetary and Financial Institutions Forum and a former Treasury Department official who served as U.S. representative to the IMF. “A lot of perplexing questions. A lot of fog.”

Rediker described the mood as "disjointed."

"There are a lot of different threads going into these meetings and they're not necessarily harmonized in one narrative," said Rediker, managing partner at International Capital Strategies. "You've got them all happening at once at a time when there's no particular leadership that is driving the agenda or the narrative in one direction or another."

U.S. officials, led by Treasury Secretary Janet Yellen, will try to project cautious optimism but will also face questions about the government’s response to last month’s regional bank failures and to what extent there is potential spillover in the global economy, especially as lenders tighten credit for businesses.

“You don’t have any real motor of growth,” said Liliana Rojas-Suarez, a senior fellow at the Center for Global Development. “It’s not that it’s one region that is weaker than the other. Wherever you look, growth is really low, and so of course that affects everything else.”

The U.S. economy is expected to grow by a tepid 0.4 percent this year, according to the Federal Reserve, before modestly accelerating to 1.2 percent in 2024. The Fed has driven the slowdown with the steepest interest rate hikes in four decades designed to tame inflation.

“There’s a fundamental challenge for the U.S., which is first and foremost it’s coming there speaking about growth in its economy, how it’s doing relatively well compared to the other advanced economies,” said Josh Lipsky, senior director at the Atlantic Council’s GeoEconomics Center and a former adviser to the IMF.

Growth prospects in Europe are uncertain as it also deals with a roiled banking industry. The European Union managed to weather the winter better than expected and skirt a recession thanks to a drop in energy prices that had reached eye-popping highs last summer.

But core measures of inflation keep rising, and the ensuing fast-and-furious tightening of the money supply by the European Central Bank spells worries for the bloc’s outlook.

The EU economy is expected to stagnate this year below 1 percentage point of growth, hitting the brakes after posting 3.5 percent last year — higher than both the U.S. and China.

“I don’t think the IMF meetings are going to be in a hopeful mood — it’s going to be kind of depressing,” Rojas-Suarez said. “People are going to pull up good potential outcomes — like, the stock market is recovering, financial contagion seems to have moderated, the markets are relatively calm now. But at the same time, the sense of fragility in every corner that you turn is I think the mood that is going to be prevalent.”

A major issue hovering over the meetings is the role of China, which just underwent a big government shakeup and is increasingly at odds with the U.S. over trade and technology. Questions include whether China should have a bigger say in the governance of international institutions commensurate with its economic power and whether it will help with efforts to ease the debt strain on developing countries, given that it's such a big lender.

"You get to a point where the very legitimacy of the institutions themselves gets challenged," Rediker said.

The World Trade Organization said Wednesday that global trade is expected to grow by 1.7 percent this year — a stronger outlook than it had in October. Still, it warned that the international economy is fragile, with commerce still recovering from Covid-19, continuing shockwaves from Russia’s invasion of Ukraine and high inflation.

The World Bank — the international lender to developing countries — said last week that new policies are needed to boost productivity and accelerate investment to head off what could be a trying decade for the global economy.

The IMF on Wednesday separately warned that the world could lose trillions of dollars of future economic output if it splits into competing geopolitical factions.

The World Bank's outgoing president, David Malpass, says the global economy is suffering from stagflation – meaning low growth with stubborn price inflation. He said at an Atlantic Council event Tuesday that the U.S. and China have rebounded but that there needs to be much more production and productivity to break out of stagflation.

That comes as the world experiences what he describes as a “reversal in development," with rising poverty and worsening literacy problems.

“If you look at things today, the challenge is that there may not be progress,” Malpass said. “We need to avoid that lost decade.”

Paola Tamma contributed to this report.

Treasury, regulators unveil bank rescue plan to stem crisis

Federal authorities took aggressive action Sunday to end days of global uncertainty and panic, agreeing to backstop all depositors for two failed lenders — and to prevent runs on any other financial institutions.

The Treasury Department, Federal Reserve and FDIC vowed that taxpayers would not bear losses from the moves to bolster the depositors at the two shuttered lenders, Silicon Valley Bank and Signature Bank. The agencies said Silicon Valley Bank’s depositors would have access to all their money on Monday.

In a stunning move, the Fed also announced that it would offer cash loans of up to a year for any bank putting up safe collateral — an action that in theory would allow banks to handle deposit withdrawals of any amount. The goal: to reassure people that they don’t need to take their money out at all.

The agencies were praised by lawmakers from both parties for taking swift action to stem a financial panic. But Federal Financial Analytics managing partner Karen Petrou said the situation was one of their own making, criticizing regulators for not acting on problems at both banks before they failed.

The massive intervention was required because the Fed and FDIC "were caught flat-footed at SVB, failing not only to anticipate its structural weakness due to concentrated deposits and illiquid assets, but also the broader shock [that] closing a big bank would do after decades of depositor bailouts," said Petrou, who advises bankers on policy.

The moves will raise questions about the extent to which new rules put in place after the 2008 financial crisis are sufficient to keep banks operating safely.

Officials sought to assure investors and depositors those rules, intended to prevent government intervention, had worked.

“The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis,” Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and FDIC Chair Martin Gruenberg said in a statement. “Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”

The dramatic moves marked an attempt by the Biden administration and regulators to contain any financial contagion triggered by Silicon Valley Bank's sudden collapse in a social media-fueled bank run on Friday.

Fear of a possible financial panic gripped Washington as policymakers and industry groups raced for information on whether the bank’s customers — which included roughly half of all Silicon Valley-backed businesses — would be able to make payroll and transact on Monday morning.

“I doubt that anyone that has anything to do with Silicon Valley Bank, both here at home and across the country, has really slept a full night without worry,” Rep. Anna Eshoo, a California Democrat whose district includes a large swath of Silicon Valley, said in an interview late Sunday afternoon.

There were also concerns that depositors might yank their funds from similar institutions, a senior Treasury official told reporters.

While the FDIC had explored a sale of SVB on Sunday, it was ultimately determined that emergency measures would offer more clarity to depositors more quickly. But the official did not rule out sales of either of the failed banks.

Sunday’s announcement, which arrived shortly before Asian markets opened, included news that Treasury, the Fed and the FDIC had made a special determination that failing to back customer deposits at the banks risked feeding out and harming the broader financial system. As a result, all the deposits of both collapsed banks will be guaranteed by the FDIC, which has a dedicated fund — financed with fees paid by banks — for this purpose.

“Right decision,” Sen. Mitt Romney (R-Utah) tweeted in response to the news.

The Fed also made adjustments to its longstanding backstop, known as the discount window, which like the new temporary lending program provides collateralized loans, but with a shorter maturity.

Historically, the Fed has charged borrowers a penalty rate, but it is now offering those loans at market rates. The discount window accepts a broader range of assets as collateral than the new emergency program.

Over the weekend, the FDIC collected bids on the assets of Silicon Valley Bank in a race to offer a path forward for businesses whose funds are stuck at the failed lender.

Venture firms and startups celebrated the announcement on Sunday, including major crypto businesses whose products were buffeted by choppy markets in the wake of SVB’s collapse.

“We were heartened to see the US government and financial regulators take crucial steps to mitigate risks extending from the fractional banking system,” said Jeremy Allaire, co-founder and CEO of the stablecoin issuer Circle. “100% of deposits from SVB are secure and will be available at banking open tomorrow."

Banks fought to fend off tougher regulation. Then the meltdown came.

Three days before Silicon Valley Bank’s failure, big bank lobbyists and executives were triumphant. They had convinced key GOP lawmakers to publicly warn Federal Reserve Chair Jerome Powell against tightening regulations on the industry.

Now, the months-long campaign is in jeopardy.

The world’s attention is focused on whether the U.S. banking system is safe. And bank lobbyists believe the Fed may now be encouraged to press ahead with tougher rules that it was just beginning to discuss before the meltdown. Sen. Elizabeth Warren (D-Mass.) warned mere hours after Silicon Valley Bank’s collapse that “regulators must not buckle to pressure” in response to the bank lobbying barrage that had been underway.

“Clearly, Silicon Valley Bank’s failure will embolden people who see the current regulatory system as insufficient,” said Brookings Institution senior fellow Aaron Klein, a former Treasury Department official and Capitol Hill economist.

While the details of how the lender collapsed are still being sorted out, the political impact of the second-largest bank failure since 2008 “is the equivalent of a lake of water being dumped on the fire that seemed lit under some Republicans to pressure the Fed,” Klein said.

It’s one immediate way that Silicon Valley Bank’s meltdown is scrambling the banking industry’s Washington playbook and forcing it to rethink how it engages with Capitol Hill.

Bank lobbyists are now hoping the narrative focuses on other elements of the system that might have failed. At stake for the biggest lenders is whether they’ll be subject to the most significant strengthening of rules since the aftermath of the global financial crisis.

“SVB’s stunningly quick collapse should put an end to the nonstop attempts by banks, lobbyists and their political allies to weaken capital and other financial regulations that protect depositors, consumers, investors and financial stability,” said Dennis Kelleher, who advocates for tougher bank oversight as president and CEO of the nonprofit Better Markets.

The rules that the big bank lobby was focused on before SVB’s failure dealt with the capital funding buffers that lenders are required to maintain so they can absorb losses during downturns and spare taxpayers from having to bail them out.

The Fed and other bank regulators hiked capital requirements in the wake of the 2008 crash. In the last few months, a top official appointed by President Joe Biden — Fed Vice Chair for Supervision Michael Barr — kicked off a “holistic review” of capital rules that were put in place over the last decade and suggested lenders should be subject to higher requirements.

Barr’s review rattled large banks. And so their main trade groups — the Bank Policy Institute, which counts SVB as a member, the Financial Services Forum and the Securities Industry and Financial Markets Association — mounted a campaign to argue that hiking capital requirements would be a drag on the economy. They churned out explainers challenging Barr’s assumptions, and executives made direct pleas to lawmakers who handle oversight of the Fed and other regulators.

“In response to higher capital requirements, banks have two choices,” JPMorgan Chase CFO Jeremy Barnum said at a March 1 Washington symposium the Bank Policy Institute held to showcase the bank capital debate. “We can charge higher prices or we can do less lending. Both of those choices are ultimately bad for consumers and businesses.”

The lobbying bore fruit last week when Powell testified before the House and Senate. Over his two days of testimony, a parade of lawmakers — mostly Republican — warned him about raising capital requirements and urged him to rein in Barr.

"Capital and its quality must be continually scrutinized," Sen. Tim Scott of South Carolina, the top Republican on the Senate Banking Committee, said at Powell’s March 7 hearing. "But increased capital does not necessarily provide an increased benefit."

That opening salvo suggested that “the banking industry may be on solid footing to battle against the worst-case scenario,” analysts with the investment bank BTIG told clients in a note after the hearings.

Then on Friday, regulators rushed to rescue SVB, and lobbyists began panicking that their push on capital might be in trouble. Critics immediately connected the dots.

“Wall Street lobbyists and Republicans in Congress are pushing Fed Chair Powell for weak capital requirements at exactly the wrong time,” Warren said on Twitter Friday afternoon. “Silicon Valley Bank's collapse underscores the need for strong rules to protect the financial system. Regulators must not buckle to pressure.”

Former Fed Governor Daniel Tarullo, who led the central bank’s regulatory policy in the Obama administration, said in an interview Sunday that the Fed’s regulatory review should revisit rules for large regional banks. He pointed to a recent Fed policy change that allowed such lenders to escape tougher rules when they hold securities that have dropped in value — the exact issue that sparked SVB’s death spiral.

“It’s a question,” he said. “It’s not an answer.”

Some industry advocates are now hoping that the narrative coming out of the SVB failure focuses on faults at the Fed and other elements of bank regulation that were eased under the Trump administration.

“I'm sure somebody will find a way to say that this means that [global systemically important banks] should hold more capital, but it's pretty hard to see that right now,” said one industry representative granted anonymity to talk candidly about the fallout. “Politics will find a way but the cogent argument is on the other side.”

A spokesperson for Scott said that what's happening with Silicon Valley Bank "highlights why we cannot have a one-size-fits-all approach" to bank capital and that regulators must "appropriately supervise banks to ensure capital levels are tailored to corresponding risks.”

To be sure, the Fed is facing growing scrutiny of how it supervised SVB and what it might have missed in ongoing oversight by bank examiners, beyond specific rules. SVB was regulated by officials from the Federal Reserve Board of Governors in Washington as well as the regional Federal Reserve Bank of San Francisco.

Tarullo, who led Fed regulatory efforts after the 2008 crisis, said he has been worried about the central bank’s supervision of the industry “for quite a while.” His Trump-appointed successor and Barr’s predecessor, Randal Quarles, advocated for a lighter supervisory touch.

“There’s clearly a supervisory gap there, and for me the question is, does the gap originate at the on-the-ground supervisors, or does it originate in the instructions they were operating under?” Tarullo said. “Did the supervisors feel inhibited?”

“What’s really at issue here isn’t the rules,” said Federal Financial Analytics managing partner Karen Petrou, who advises bankers and others on policy. “It’s how they were enforced by supervisors clearly asleep at the wheel because they thought they had a safe, self-driving car.”

Victoria Guida and Sam Sutton contributed to this report.

House GOP presses agencies on small business rules

House GOP lawmakers are launching a sweeping oversight effort aimed at ferreting out how agencies across the federal government weigh the potential impact on small businesses when crafting regulations.

House Small Business Republicans, led by Chair Roger Williams of Texas, Rep. Blaine Luetkemeyer of Missouri and Rep. Beth Van Duyne of Texas, sent letters to 25 agencies Wednesday about their compliance with laws that require them to analyze the effects of new rules on small employers and to produce compliance guides for those firms. The committee's push is designed to shield small businesses from burdensome regulation.

The targets include the EPA, the DOL, the IRS and the CFPB. In the letters, committee Republicans cite examples where they said agency regulatory work has fallen short when it comes to small business impact.

Why it matters: The investigation by Williams, who owns a car dealership, is part of a broader House Republican oversight campaign that's digging into agency work across the Biden administration.

What's next: Williams said in a statement that the letters "are simply the starting point" of the committee's work.

"As our nation’s job creators deal with unprecedented levels of inflation, supply chain disruptions, and an inability to find quality workers, it is imperative we are not adding additional layers of compliance to further limit their ability to grow," Williams said.

‘Intellectually bankrupt’: Biden allies blast GOP debt-limit backup plan

The Biden administration warns of catastrophe if Congress fails to raise the government’s borrowing limit in the coming months. But some Wall Street executives and analysts are starting to break from that script.

A number of prominent financial experts at Bank of America, Barclays and other major firms are confident that the U.S. will avert a global market meltdown by continuing to pay its bondholders if the Treasury Department crosses the threshold where it can’t cover all its other bills. They think the U.S. can do so by withholding funds for things like benefits owed to individual Americans or payments to firms doing business with the government.

It’s a view that aligns with those of conservative lawmakers, who argue that payment prioritization on Treasury securities — the bedrock of the international financial system — is a viable contingency plan as they push for budget cuts opposed by President Joe Biden.

The White House and Treasury are already putting up resistance to the idea, which Treasury says would amount to a default. But disclosures over the past several years — driven in part by investigations by House Republicans — have revealed that officials believe the government has the technical capacity to implement payment prioritization, though it would be experimental and risky.

"Most investors who follow this closely are very aware the United States will not default on its bonds,” Ajay Rajadhyaksha, global chair of research at Barclays, said in an interview.

The debate around the potential backup plan underscores the economic uncertainty that’s already being triggered by the political stalemate around raising the debt limit, the total amount of money that Congress authorizes the government to borrow. Many on Wall Street doubt payment prioritization would work.

It’s also a window into the fraught choices awaiting the Biden administration if lawmakers are unable to resolve the impasse. Paying bondholders instead of everyone else — individuals and businesses depending on checks from the government — would likely trigger a political backlash and potentially slow the U.S. economy as a possible recession already looms, depending on how long it lasted.

“The notion is intellectually bankrupt,” former Treasury Secretary Jack Lew, who led the department under President Barack Obama, said in an interview.

But even some critics of payment prioritization concede it might be the least-bad of what are all bad alternatives, such as legally questionable proposals like minting a trillion-dollar coin to pay the government’s bills. Conservatives, including Sen. Rick Scott (R-Fla.), have suggested maintaining payments on Treasury debt, Social Security, Medicare, veterans and the military.

“Of all the unilateral options on the debt ceiling, prioritization is probably the healthiest horse in the glue factory,” Cowen policy analyst Chris Krueger said.

Washington and Wall Street are ramping up discussions around contingency plans after the U.S. hit its legal borrowing limit on Jan. 19. Treasury is now using accounting maneuvers known as extraordinary measures to keep paying the government’s obligations. In this case, Treasury is suspending investments in government retirement accounts.

The department hasn’t publicly outlined its ability to pick and choose whom to pay if it breached the “X-date” — the deadline when it wouldn’t have enough cash to cover all its bills. The idea came into focus when the U.S. nearly went over the cliff during the 2011 debt limit fight — an episode of brinksmanship that resulted in S&P downgrading the country’s credit rating for the first time in history.

House Republicans spent the ensuing years investigating what Treasury could and couldn’t do.

In a 2014 letter to the GOP chair of the House Financial Services Committee, a top Treasury official said systems at the Federal Reserve Bank of New York would be “technologically capable of continuing to make principal and interest payments while Treasury was not making other kinds of payments, although this approach would be entirely experimental and create unacceptable risk to both domestic and global financial markets.”

The official, then-assistant secretary for legislative affairs Alastair Fitzpayne, said “no decision regarding what to do in such a situation was made during the recent debt limit impasses, and potential responses have not been tested.”

J.W. Verret, who worked on the investigation as an aide to the Financial Services Committee, said Treasury and the Federal Reserve made available documents that showed in-depth tabletop exercises for how to prioritize payments. They indicated “there’s no inherently structural issue that stops them from doing it,” according to Verret, who reviewed the documents.

The committee's Republican leaders — including current Chair Patrick McHenry (R-N.C.) — told Treasury in a 2014 letter that documents prepared by the New York Fed "exhaustively detail how the department and the bank would implement any plan to prioritize payments on Treasury bonds."

Lew confirmed in the interviewthat officials ran an exercise to see whether the government could physically pay bond payments and nothing else. He still thinks it’s a bad idea.

“As a tabletop exercise, we reached the conclusion you might be able to,” he said. “It’s never been tested in the real world. We don’t know what the cash flows required are. We don’t know how that would interact with other systems being on or off.”

Lew, who argues that prioritization is “accepting default,” said the two presidents he worked for — Bill Clinton and Obama — never made the decision to pay bonds over other obligations.

“Only the president can make that decision,” he said. “It’s not a decision the Treasury secretary alone can make. No president should be forced to make that decision.”

Treasury Secretary Janet Yellen has also come out forcefully against the concept.

“A failure on the part of the United States to meet any obligation, whether it's to debt holders, to members of our military, or to Social Security recipients, is effectively a default,” she told reporters earlier this month.

She added that Treasury's systems were built to "pay all of our bills when they are due and on time, and not to prioritize one form of spending over another.”

PIMCO, a bond-trading behemoth, has added its voice to the naysayers.

PIMCO head of public policy Libby Cantrill said in a statement: “We take Secretary Yellen and previous Treasury secretaries – both Republican and Democratic – at their word that prioritizing payments under Treasury’s existing systems is simply not viable and should not be viewed as a feasible alternative to Congress raising the debt ceiling.”

But warnings aren’t enough to dissuade some financial industry analysts and executives that Treasury could pull it off.

“They have the tools available to be able to avoid a default or a disruption in the capital markets,” said Unlimited Funds CEO Bob Elliott, who previously led research at hedge fund giant Bridgewater Associates. “We would expect them to use those tools to ensure that the U.S. doesn’t experience a default.”

Bank of America rates strategist Ralph Axel said Treasury should be more forthcoming.

“They need to tell everybody what the real deal is with the Treasury market and whether or not this is a true massive threat or if it’s actually completely benign, which I think it is,” he said.

But payment prioritization believers on Wall Street still argue that it carries risks.

Even if the market for Treasury securities avoided disruption, the missed payments to other individuals and businesses could be a drag on the rest of the economy.

Elliott said the real risk is that it goes on for months, in which case people would start to cut spending.

"My fear is that X date is hit. The day after, not a whole lot happens and a bunch of people who are holding out say, 'See, everything’s totally fine,'” Rajadhyaksha with Barclays said. “This is a slow burn. The longer it takes the worse it gets."

Biden, House GOP refuse to budge as key debt ceiling deadline looms

The Biden administration and House Republicans are heading toward an initial Thursday debt ceiling deadline without even a hint of an endgame, ensuring a months-long standoff that's poised to rattle financial markets amid worries about a recession this year.

The two sides are effectively shrugging as the Treasury Department warns the country will hit the $31.4 trillion borrowing cap Thursday — though it’s not a hard deadline, as the department can still use extraordinary measures to pay the bills for another few months. But it means the potential economic doomsday clock is officially ticking, with House Republicans still insisting on massive spending cuts before they help raise the debt ceiling and Democrats refusing to engage the idea.

Treasury Secretary Janet Yellen said last week that the U.S. likely won’t run out of cash or exhaust those measures until at least early June. Until then, the department is suspending investments in certain government retirement funds and hoping the House GOP and Democrats can come to an agreement to keep the government from careening into an economic crisis with far-reaching consequences.

But Yellen’s warning to congressional leaders hasn’t spurred any movement toward even the beginning of a deal between Congress and the White House. The biggest legislative battle of the year is just beginning — and threatening to grow even messier than the 15-ballot speakership fight — and there’s no exit strategy in sight.

Even some Republicans viewed as more likely to negotiate with the White House are already taking aim at the administration's position after White House press secretary Karine Jean-Pierre said last week: “We will not be doing any negotiation."

“Maybe we should not just draw lines in the sand immediately, including the White House,” said Rep. Kelly Armstrong (R-N.D.), calling the administration’s refusal to negotiate on fiscal reforms “disappointing.”

“If we default on our debt, there's going to be huge ramifications,” he said. “I'm not interested in bottoming out everybody's 401k. They've already had a tough year.”

The White House is already working behind the scenes to work around Speaker Kevin McCarthy, including dispatching its top advisers to meet with moderate Republicans — particularly those who won in districts President Joe Biden won in 2020 — in hopes Democrats can count on those GOP lawmakers to cross the aisle and lift the debt ceiling.

“I think there is a real chance of that,” said one senior House Republican. “Kevin would probably love for that to happen because it gets him out of — ‘it wasn’t me.’”

Others think the White House needs to come at it differently for officials to have any hope at cross-aisle cooperation.

“Biden’s initial comment of zero negotiations is a non-starter,” said Rep. Don Bacon (R-Neb.), who said he personally hasn’t heard from the White House. “[Republicans] can’t get 100 percent of what we want with only control of half of Congress, but our voters sent us to D.C. to control spending, so the Democrats have to show some movement our way, too.”

“Both sides need to negotiate in good faith,” he added.

Concessions over the debt ceiling were a vital part of the deal that McCarthy negotiated with his 20 conservative holdouts to finally attain the speakership. He agreed that the GOP House wouldn’t move to lift the debt ceiling unless Congress slashes at least $130 billion in federal spending next fiscal year or addresses broader fiscal reforms that tackle the ballooning debt, as many Republicans argue it threatens the nation’s economic security and future.

Such spending cuts should be negotiated as part of the annual budget and appropriations process Congress will also have to tackle later this year, said Sen. Chris Van Hollen (D-Md.). He argued it shouldn’t occur during a high-stakes battle over the nation’s borrowing authority.

"We've been very clear. The President's been very clear. It's everybody's duty to make sure the United States pays its bills on time,” Van Hollen said. “There will be no negotiations over the debt ceiling and paying our bills on time.”

But Republicans, who are still deciding how to populate their committees after the speakership fight delayed those moves, said concrete discussions about potential demands haven’t even begun.

Some GOP members are beginning to float more specific plans as the debt-ceiling fight gets officially underway, like the return of a controversial payment prioritization plan that former Sen. Pat Toomey’s (R-Pa.) proposed during a similar showdown about a decade ago. Such a plan would allow the government to keep paying its bondholders if both parties can’t reach an agreement, while dictating what other financial obligations would lapse.

“I fully support the debt prioritization plan as it’s one of the many steps that have to be implemented,” said Rep. Ralph Norman (R-S.C.), a Freedom Caucus member who was among the 20 conservative McCarthy holdouts. Norman has argued his main priority is working to balance the budget over the next 10 years or less.

Meanwhile, the primary concern for financial markets is whether the debt ceiling brawl forces the U.S. to miss a payment owed to Treasury bondholders. Treasuries — usually seen as extremely safe assets — underpin the global financial system and are closely tied to lending products like mortgages. Missing a payment could send the stock market off a cliff, though Wall Street analysts are split about how much of a threat the standoff actually poses to the economy, with some banking on Congress and the White House reaching some sort of deal before the federal government misses any debt payments.

Some of the Republicans pushing the payment prioritization plan, first reported by the Washington Post, include Rep. Chip Roy (R-Texas), one of the 20 holdouts. He told the Post: “We agreed to advance a debt prioritization bill through regular order by the end of the first quarter of 2023 … Now, the contours of that were not specified (there are different versions).”

The hotly debated idea divides Republicans and budget experts alike, and the administration has already swatted it down. White House chief of staff Ron Klain tweeted that it would sow “CHAOS” in the U.S. and “cut off funding” for food safety, FAA operations, border security and drug enforcement.

“This so-called prioritization scheme makes Republicans’ priorities pretty clear,” Jean-Pierre said Tuesday. “They want to put wealthy bondholders over ordinary Americans.”

It’s unclear what capability the Treasury Department has to prioritize payments, with officials declining to comment last week on whether it’s even an option. A top Treasury official stressed in a December speech that debt limit stalemates hurt the department's cash balance and trigger market volatility. Treasury officials told House Republicans in 2014 that while the government could technically prioritize payments, such a plan would be “entirely experimental and create unacceptable risk to both domestic and global financial markets.”

Payment plan aside, the debt ceiling is a critical political battle for the House GOP. With McCarthy commanding only a narrow majority that can move to topple him at any time, even lawmakers who count him as a friend predict the showdown won’t end well for him.

“It will cost Kevin his job,” said Sen. Kyrsten Sinema (I-Ariz.).

Burgess Everett, Alex Ward and Adam Cancryn contributed to this report.