Right-wing Republicans revolt against debt-ceiling deal, risking the very bankruptcy they worry the federal deficit will cause.

(Originally published May 31 in “What in the World“) A revolt among conservative Republicans threatens to scuttle a weekend deal to raise the U.S. government’s debt ceiling before June 6, when the Treasury Dept. now estimates it will run out of cash.

Congress is now racing to pass a bill turning the deal into law. The bill on Tuesday night won approval by the House of Representatives’ Rules Committee after one of its three Republican members backed it despite Republican threats to block it. But House Speaker Kevin McCarthy must still overcome protests from the arch-conservative House Freedom Caucus and other conservative Republicans to deliver the votes needed to pass the Republican-controlled House and move to the Democrat-controlled Senate.

That the Congress has again willingly risked defaulting as part of budget negotiations has already threatened the financial world’s faith in U.S. creditworthiness. A survey by the World Gold Council of central bankers found that 62% of central banks see shifting more of their reserves into gold, while roughly half predicted shifting more of their reserves out of U.S. dollars. Central banks typically park their dollar reserves in U.S. Treasuries.

If and when the debt ceiling bill passes, financial markets will shift back to obsessing about the Federal Reserve and its fight against inflation. And the outlook there isn’t great, either.

U.S. salaries and spending continue to climb, according to the latest data, suggesting inflation remains a problem and that the Fed may have to raise interest rates yet again at the next meeting of its rate-setters in June. Futures markets are pricing in a 60% chance that the Fed will raise rates by another 25 basis points at the June 14 meeting of its Federal Open Market Committee.

The Bureau of Economic Analysis reported Friday that consumer spending rose 0.8% in April compared to the previous month, accelerating slightly after two months of nearly flat spending. Incomes rose 0.4%. Perhaps most tellingly, the price index for personal consumption expenditures excluding food and energy, a key gauge for Fed policymakers, climbed 4.7% from the same month last year. Leading the increase are prices for school lunches, mutual fund fees and eggs as consumers boosted spending on traveling abroad, seeing movies, housing, and healthcare.

School lunches are skyrocketing thanks to the end of a Federal pandemic program that gave free lunches to kids. Persistent supply chain problems have pushed up the cost of food as well. That helps explain the soaring price of eggs, which have also been driven up by an outbreak of avian flu.

The surge in foreign travel is the lingering effect of post-pandemic “revenge travel,” as Americans splash out with money saved staying at home while Covid-19 raged. Rising U.S. interest rates have also pushed the dollar up against other currencies, lowering the relative cost of foreign vacations for Americans.

The budget deal spares President Joe Biden’s 3.3% increase in military spending for the current fiscal year—to $886 billion. Republicans are just as rabid about facing down China, Iran, Russia, and North Korea as Democrats. The Pentagon may then face one year without increases before the deal ends and budgets can be negotiated upwards again. But with Republican hawks already calling the 3.3% too low, it remains to be seen whether the deal’s spending caps can endure bipartisan bellicosity.

Yields on U.S. 10-year Treasuries jumped ahead of the long Memorial Day weekend by almost 10 basis points to 3.81% amid concerns about inflation and whether a debt-ceiling deal could be struck and passed through Congress in time to avoid a default. After the deal was struck, they dropped back to 3.69% on Tuesday despite concerns about whether Congress would approve it.