NEW YORK — U.S. stocks dropped Thursday as investors worried that a budget stalemate in Congress would become entangled with much more critical legislation to raise the federal borrowing limit.
The standoff between congressional Democrats and Republicans to pass an emergency funding bill, which has led to a third day of a partial U.S. government shutdown, continued with little sign of progress toward a solution.
STOCK MARKET: Stocks went into a nose dive earlier in the day when the Treasury Department warned of the dire consequences that might arise from the debt-ceiling issue, which some strategists view as blending together with the government shutdown. If Congress doesn’t raise the debt limit and the U.S. defaults on its obligations, that would be “catastrophic” for financial markets and the economy, potentially resulting in more damage than the 2008 financial crisis, the Treasury said.
Stocks trimmed losses after it was reported that House Speaker John Boehner told colleagues that he would not let the United States default on its debt.
Boehner’s spokesman said the speaker had always said that the United States will not default on its debt.
“The fact is that every day we are looming closer and closer to the debt ceiling issue, which is the real concern,” said Randy Frederick, managing director of active trading and derivatives at Charles Schwab Corp. in Austin, Texas.
“While market losses haven’t been too big during shutdowns, we did retreat about 17 percent in the summer of 2011 just before raising the debt ceiling.”
The CBOE Volatility Index (VIX), often used to measure investor anxiety, jumped as high as 18.71, its highest level since late June. The VIX rose 160 percent to 42.96 in the third quarter of 2011 as the S&P 500 index fell 14 percent, the biggest retreat since 2008.
The Treasury has said the United States will exhaust its borrowing authority no later than Oct. 17. If no deal is reached on raising the debt ceiling, the United States could default on its debt.
BOND BUYING: Several Federal Reserve officials spoke Thursday. John Williams, president of the Federal Reserve Bank of San Francisco, said the central bank’s bond-buying program should be “mothballed” once the economy recovers and the short-term interest rate is back to a more normal level. Dallas Fed President Richard Fisher said the decision not to taper in September increased uncertainty over the central bank’s path going forward.
NO JOBS REPORT: Meanwhile, the latest victims of the government’s partial shutdown: policy wonks, politicians and TV talking heads who are losing their monthly opportunity to dissect the jobs report issued by the Bureau of Labor Statistics.
It happens the first Friday of the month at 8:30 a.m. Eastern time. Except this Friday.
The government’s partial shutdown means the September jobs report is being postponed. The workers who produce it aren’t deemed “essential,” which is why they’re among the 800,000 federal employees being furloughed.
Yet for a subculture of Americans whose professional lives are tied to the monthly jobs report, its absence could be disorienting.
“Economists and journalists will have some withdrawal pains,” suggested Mark Zandi, chief economist at Moody’s Analytics and a fixture on cable-TV gabfests after the jobs reports are released.
Diane Swonk, chief economist at Mesirow Financial and another regular television presence on the morning of the jobs reports, jokes that she won’t have to get up so early Friday.