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Here’s a quick recap on where the economy stands as we (hopefully) enter the final innings on the 2023 debt ceiling debacle.

Credit conditions are tightening. Consumers are losing confidence — even if their spending habits say otherwise — and inflation remains elevated. Jerome Powell and other Federal Reserve officials aren’t eager to lower rates as they watch for signs of cooling labor markets and consumer prices. And while there’s hope the U.S. can avoid a recession, staff economists at the central bank aren’t particularly bullish.

Here’s why that matters: The possibility of an economic downshift — with no promise of relief in the form of rate cuts — will bear on how the market receives whatever deal President Joe Biden and House Speaker Kevin McCarthy broker on the debt limit. If it includes overly restrictive spending cuts, we could see a repeat of the sell-off that followed the 2011 crisis.

“It was almost paradoxical, but the equity market, the S&P 500, fell after the debt ceiling passed” in 2011, Mike Reynolds, the vice president of investment strategy at Glenmede, told MM. Depending on what, if any, “austerity” measures make the cut in a debt limit package, “we do think that there could be some equity market volatility around this,” he said.

For now, Wall Street’s response to the debt limit battle has been relatively narrow (much to the chagrin of certain Democrats). That could change with how final negotiations play out in the coming days, particularly now that Biden has cut short a planned trip to Australia and Papua New Guinea and elevated two top aides to close the deal.

In 2011, stocks started cratering in late July — about 10 days before the Aug. 2 “X-date” — and continued falling until President Barack Obama and Republicans announced a deal on July 31.

The carnage didn’t stop there, however. Two days after Obama signed the debt ceiling bill, the stock market reported its worst losses since the financial crisis as traders absorbed how the agreement – which forced major spending cuts – would hit an economy that was still stuck in the mud.

On Aug. 5, S&P announced a historic decision to downgrade U.S. sovereign debt, which further pushed down equity markets. Volatility gauges surged. Major indices didn’t recover until the following year.

Two big caveats: The economy is much more resilient now. The unemployment rate was nearly three times higher than it is today. Quantitative easing was still underway at the Fed. While there are signs a recession could be imminent, most expect it to be milder than the 2008 downturn.

“If we do pull back from the brink, you may not see that sharp reaction that we saw in 2011,” MSCI Managing Director Andy Sparks, who heads the investment firm’s portfolio management research team, told your host. “It may be more like 2013” when markets responded more favorably.

Just as importantly, while House Republican leaders are pushing for spending cuts now — something key leaders have argued could help cool inflation — they could easily backtrack if an economic contraction starts to hammer red districts, said RSM US chief economist Joe Brusuelas.

Even if new spending caps are binding, “the current track of negotiations between the White House and the Congress strongly suggests that whatever caps are put in place will not constrain the ability of the fiscal authority to respond to whatever needs arise in case of recession,” he said.

IT’S WEDNESDAY — As the proud namesake of a Monmouth County rest stop once said, we’re halfway there. Send tips, gossip and suggestions to Sam at [email protected] and Zach at [email protected].

Former Silicon Valley Bank CEO Greg Becker, Former Signature Bank Chair Scott Shay, New York Department of Financial Services Superintendent Adrienne Harris and California Department of Financial Protection and Innovation Commissioner Clothilde “Cloey” Hewlett testify at House Financial Services at 10 a.m. … Goldman Sachs CEO David Solomon and former New York City Mayor Michael Bloomberg will host an event for the bank’s small business program in Baltimore with Mayor Brandon Scott and Gov. Wes Moore at noon … Sen. Elizabeth Warren chairs an oversight hearing on Fed ethics policies at 2:30 p.m.

First in MM: Speaking of Warren — The Massachusetts Democrat blasted Fed Inspector General Mark Bialek in a letter before today’s hearing on the rash of trading scandals at the central bank. “Your failure to hold Chair Powell — at whose discretion you serve — accountable is the clearest possible example showing that your office lacks the tools necessary to effectively perform its important responsibilities as the Fed’s independent watchdog,” wrote Warren. Warren and Sen. Rick Scott (R-Fla.) introduced a bill earlier this year to make the inspector general a presidential appointee.

Cautious optimism — Business Roundtable CEO Joshua Bolten said he was “encouraged” by the appointments of lead negotiators in the debt limit talks, the business group said in a statement on Tuesday. Longtime Biden adviser Steve Ricchetti and Office of Management and Budget Director Shalanda Young will play point for the administration, while McCarthy designated Rep. Garret Graves (R-La.) as lead.

— Our Josh Siegel: “House Republican leaders are pushing a deal as part of the debt ceiling negotiations that would include narrow efforts to speed up permits for energy projects — but postpone action on Democrats’ proposals to ease the movement of wind and solar power.”

— Zach reports that Treasury Secretary Janet Yellen escalated her warnings of “widespread suffering” and a potential stock market crash if Washington fails to raise the government’s borrowing authority at Tuesday’s Independent Community Bankers of America conference in Washington.

— Reuters: “Americans are worried about the prospect of the U.S. government defaulting if Congress fails to raise the debt ceiling, but are divided over the action to be taken.”

He’ll get another opportunity today — NYT’s Rob Copeland on the testimony of Silicon Valley Bank’s former CEO Greg Becker at Senate Banking on Tuesday: “In his first public remarks since Silicon Valley Bank collapsed, triggering widespread industry turmoil, the lender’s former chief executive pointed the finger at pretty much everybody but himself, casting blame on regulators, the media, his board of directors and even the bank’s own depositors.”

Meanwhile, at the Fed — Steve Matthews, Jonnelle Marte and Peter O’Dwyer: “One of the Federal Reserve’s more hawkish policymakers suggested it will need to keep raising interest rates, while four others stressed watching the impact of their tightening so far. The remarks on Tuesday by Cleveland Fed President Loretta Mester, New York Fed chief John Williams and Richmond’s Thomas Barkin, Dallas’s Lorie Logan and Chicago’s Austan Goolsbee expose ongoing internal debate over a pause on rate hikes next month.”

Stuck — The WSJ’s Peter Grant: “When average city office-occupancy rates at the start of the year surpassed 50% for the first time during the pandemic, many landlords viewed this milestone as a sign that employees were finally resuming their former work habits. Those office-usage rates have barely budged as most companies have settled into a hybrid work strategy that shows little sign of fading.”

— FT: “BlackRock calls employees back to the office four days a week”

Call a friend — Also from Zach: “Reps. Josh Gottheimer, David Scott and Vicente Gonzalez on Tuesday pressed SEC Chair Gary Gensler to crack down on short selling that has pressured banking stocks, arguing that it threatens the industry … They echoed recent calls by banking trade groups.”

Settlement — Our Declan Harty: “Wells Fargo has agreed to pay $1 billion to settle a class-action lawsuit alleging that it misled investors about how regulators viewed its progress following a fake account scandal at the San Francisco-based lender.”

Rep. Maxine Waters and House Dems wrap up stablecoin feedback — Already, fault lines are emerging.

“I may have some technical points about the Know Your Customer and anti-money laundering provisions of our bill,” fellow California Democrat Rep. Brad Sherman told Eleanor Mueller. On the former, “I’ve got to look at the text of the bill and how [it] interacts with existing statutes to see how clear it is that the Know Your Customer would apply to the entire ecosystem.”

Is this the ‘regulatory clarity’ you’re looking for? — Our Bjarke Smith-Meyer: “Finance ministers today rubber-stamped EU legislation, DAC8, that will require crypto companies to disclose who owns what digital assets on their books … Armed with that information, it’s only a matter of time before legislators design new levies for an industry that was worth $3 trillion at its peak in 2021.”

Former Carlyle Group global partner and director of communications Chris Ullman has joined Narrative Strategies as a senior adviser.

Charlie Anderson is joining Arnold Ventures as executive vice president for infrastructure. He most recently was special assistant to the president for economic policy at the White House National Economic Council. — Daniel Lippman

Merav Ceren is now deputy policy director for the Senate Committee on Commerce, Science, and Transportation. She most recently was senior professional staff member for the House Committee on Oversight and Accountability. — Daniel