The International Monetary Fund and the United States Treasury turned up the heat on members of Congress to end the deadlock over America's public finances yesterday, as it was confirmed that a key economic data release will be postponed because of the federal government shutdown.
Christine Lagarde, the IMF director general, warned that it was "mission critical" for Congress to vote to increase the federal debt ceiling before 17 October, when the Washington government is expected to run out of cash to fund its national debt.
"The government shutdown is bad enough but failure to raise the debt ceiling would be far worse," said Ms Lagarde in a speech to George Washington University in the capital. "It is mission critical that this be resolved as soon as possible".
That urgent message was echoed by a report from the Treasury, which stated that a default by the US could plunge the country into a recession "worse than any seen since the Great Depression".
The Treasury added: "A default would be unprecedented, and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket."
In a sign of the impact of the government shutdown, which began on Tuesday morning, the Department of Labour said that September's non-farm payroll jobs report would not be released today as statistics agencies are considered "non-essential", and staff have been put on unpaid leave.
Speaking on a visit to Maryland, President Barack Obama said the intransigence of Congress' Republicans over the budget and the debt ceiling sprang from their "obsession" with opposing his 2010 health insurance reforms, and warned that "the whole world will have problem" unless they backed down.
"This whole thing is about one thing – the Republican obsession with the Affordable Care Act. That seems to be the only thing that unites the Republican Party right now," he said.
In an indication of creeping traders' nerves over the impending debt ceiling, US 10-year Treasury bond yields fell by three basis points to 2.59 per cent even as the government's short-term financing costs crept up. America's one-month borrowing cost slipped below its six-month borrowing costs, with this "inverted yield curve" reflecting the heightened near-term risk of default.
Equity markets showed signs of fear too, with the Dow Jones Average trading down by 1 per cent yesterday afternoon. The S&P 500 index was down by a similar amount.
The president of the San Francisco Federal Reserve, John Williams, giving a speech in San Diego, said that the uncertainty surrounding the debt ceiling had created a "very frightening" situation, and that it justified the US central bank keeping monetary policy loose for longer.
The Federal Reserve surprised financial markets last month when it voted against tapering its $85bn-a-month asset purchases, as was widely expected.
There were also noises of concern from Europe over the situation. The European Central Bank board member Christian Noyer said the political impasse in Washington created a "global risk", and added that he did not dare imagine what would happen in the event of a default on US Treasury bonds.