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Programming Note: We’ll be off this Monday for Memorial Day but will be back in your inboxes on Tuesday.

The stock market is starting to realize that Washington might actually screw this up.

While the base assumption of most analysts is that President Joe Biden and House Speaker Kevin McCarthy (R-Calif.) will come up with something — anything — to raise the debt limit before Treasury misses a bond payment or skimps on other obligations, their confidence is getting shaky.

JPMorgan Chase’s Chief U.S. Economist Michael Feroli warned clients on Wednesday that there’s a 25 percent “and rising” chance of the U.S. hitting its ‘X-date’ without raising the debt limit. Stocks, typically the last market gauge to register panic when the full faith and credit is on the line, have slid over the last five trading days as the calendar inches toward June 1 — the earliest Treasury says the U.S. could be unable to pay all its bills. The CBOE Volatility Index – colloquially known as the ‘fear gauge’ — is ticking upward.

“I am worried and the discussions I’ve had today in Washington didn’t help,” Citi CEO Jane Fraser said at the Investment Company Institute conference, per our Declan Harty. “It’s not just getting a plan. It’s getting everyone to actually then get on board with that plan, and I don’t think it’s easy — from what I hear from either side — to do.”

The market’s reaction might get worse before it gets better. Fitch Ratings on Wednesday night put the U.S. on notice for a possible credit downgrade with both sides at an impasse.

To be sure, the political challenges are real. Public polling has been all over the map as to whether Americans want a debt limit deal to include spending cuts. Some Democrats are grousing that they miscalculated their hand. McCarthy’s narrow majority has its own challenges.

But we’re close to a point where no one comes out of this looking good.

“The reality is, if we breach the debt limit, history will blame the president. But in the near term, it’s going to screw the economy up so bad that if you’re an incumbent, you’re going to lose if you’re up in 2024,” said Kroll’s Chief Policy Strategist Chris Campbell, an assistant Treasury secretary during the Trump administration, told MM

“Washington’s broken. No one’s rising the challenge. People vote on pocketbook issues first, and everything else is far second,” he added.

IT’S THURSDAY — RIP to a singer who was simply the best. Send tips, gossip and suggestions to Sam at [email protected] and Zach at [email protected].

SEC Chair Gary Gary Gensler speaks at ICI at 8:15 a.m. … Revised first-quarter GDP will be released at 8:30 a.m. … House Financial Services has a hearing on financial institutions in the era of great power competition at 9 a.m. … Deputy Treasury Secretary Wally Adeyemo speaks at ICI at 10:10 a.m. … Reps. Ro Khanna (D-Calif.), Jesus Garcia (D-Ill.) and Val Hoyle, (D-Ore.) have a press conference on stock buyback legislation at noon … The SEC has a closed meeting at 2 p.m.

Have a great weekend! — Our Sarah Ferris, Jennifer Scholtes and Nicholas Wu: “House Democrats, whose votes will be needed to pass any debt deal that steers the nation away from a painful default next month, are beginning to sound the alarm as White House-GOP talks stretch on … Lawmakers will be told they can go home for Memorial Day weekend after votes Thursday but to be prepared to come back to D.C. in case there’s a debt limit deal.”

— And Jordain Carney tweets: “GOP saying it will stick with 72 hours to review text”

Big fight over a small slice — As the NYT’s Jim Tankersley notes, the potential cuts targeted by Republicans only cover nondefense discretionary spending, which “accounts for less than 15 percent of the $6.3 trillion the government is expected to spend this year. It is not outsized, by historical standards. It is already projected to shrink, as a share of the economy, over the next decade.”

— Economist Melissa Kearney, a director of the Aspen Economic Strategy Group, along with fellow Luke Purdue published a policy brief on Wednesday outlining how the programs at the center of the talks represent only a small fraction of federal outlays.

The cleanest dirty shirt — A U.S. default would be very bad, but it might not spell doom for Treasury markets. In fact, in the short term, it might cause them to surge. Josh Lipsky, a senior director of the Atlantic Council’s GeoEconomics Center, argued in a recent blog post that markets are likely to still view Treasuries as the closest thing to a risk-free asset even if the U.S. fails to pay its creditors next month.

“If there’s a belief that the US is going to resolve this in the near term — even if we’re in the terrible scenario of default – I still think Treasuries will be viewed as the safest asset in that environment,” Lipsky told your host on Wednesday. Alternatives like the German bund or Japanese government bonds can’t absorb the amount of demand commanded by Treasury securities, he added.

— Bloomberg’s Richard Henderson: “The dollar fell versus the yen while gold inched higher after Fitch warned it may cut its rating for the US.”

There’s an Israel angle — The spillover from the debt limit impasse could hit Israel’s finances as well. As Moody’s noted in a recent report, certain classes of Israeli bonds are guaranteed by the U.S. government — and “any rating action on the issuer rating of the US government would be mirrored by actions on the ratings of these bonds.” (The Israeli embassy did not respond to a request for comment. The American Israel Public Affairs Committee, which lobbies on U.S. policy affecting Israel, said it has not taken a position on this issue).

What would the Fed do? — Fed Chair Jerome Powell told Democrats this week that he did not want to talk about the debt limit. That doesn’t mean those discussions aren’t happening behind closed doors at the central bank. According to the May 2-3 FOMC minutes released Wednesday, “a number of participants emphasized” that the Fed should “maintain readiness to use its liquidity tools, as well as its microprudential and macroprudential regulatory and supervisory tools, to mitigate future financial stability risks.”

So, what’s that mean? Bloomberg’s Chris Anstey reports that could be a reference to “using repurchases to inject liquidity, and even the possibility of buying or swapping Treasury securities that had been subjected to a technical default — with interest or principal not having been paid on time.”

What’s next? — The WSJ’s Nick Timiraos: “Federal Reserve officials agreed unanimously to lift rates at their meeting this month but split on whether they would need to raise them in June, with some ready to pause.”

“The tightening that we’ve done is just starting to show up into the economy,” Atlanta Fed President Raphael Bostic told Marketwatch on Wednesday. “The real question is, how fast is that bite going to slow things down?”

It’s not all the debt limit — Mohamed El-Erian, president of Queens’ College, Cambridge and chief economic adviser at investment giant Allianz, told your host in an email on Wednesday that uncertainty over the Fed’s path forward, along with the debt limit impasses, is also a factor in “the nervousness of the equity market.”

Shareholders — More from Declan: A leading manufacturing trade group is heading to court to try to cut the SEC out of corporate America’s handling of shareholder proposals. The National Association of Manufacturers on Wednesday filed a motion to intervene in a lawsuit against the SEC that challenged a recent agency decision to allow Kroger to block a conservative organization’s anti-discrimination proposal.

We don’t need another hero — Our Ben Lefebvre: BlackRock investors are pushing back against the idea that the $9 trillion asset management fund should take an active role in decarbonizing “the real economy.”

At its investors day meeting, shareholders owning about 90 percent of the fund voted against a resolution that would have had the world’s largest asset manager compile a report “specifying whether and how BlackRock could improve its pension fund clients’ investment returns, by focusing its climate-related investment stewardship and proxy voting to ‘engineer decarbonization in the real economy.’”

BlackRock CEO Larry Fink, in explaining management’s opposition to the idea, said it was the fund’s job to serve clients and not push for one particular strategy: “Our role is not to engineer real world decarbonization,” Fink said at the event. “Our job is to help each and every client navigate investment, risks and opportunities associated with a [energy] transition.”

Blackstone weighs regional bank assets — Bloomberg’s Dawn Lim: “Blackstone Inc. Chief Executive Officer Steve Schwarzman said the investment giant is in talks with several US regional banks to explore purchases of assets and loans they originate. ‘Pressure on those regional banks won’t just come from the markets,’ he said in a video interview Wednesday for the Qatar Economic Forum in Doha.”

House Republicans push forward on crypto — Our Eleanor Mueller: The House Financial Services Committee is on track to produce text of its pair of cryptocurrency bills — and another hearing — within the next few weeks, said Rep. Warren Davidson.

“I feel optimistic we’ll have text soon that we can share,” the Ohio Republican said. “We’ll hopefully get some bipartisan consensus on stablecoins, and we’ve had great collaboration with the Ag Committee on the market structure bill, so I’m optimistic about the progress we’re making there.”

Rachel McCleery, an Obama Treasury and Senate Finance alum who was most recently at Ford Motor Co., has joined Treasury as a senior adviser on IRA implementation.