The debt ceiling debacle in Washington has the potential to upend the financial market and prompt the Federal Reserve to cut interest rates, Bank of America warned. The Wall Street firm sounded the alarms on the impact on investment grade credit market in the event the U.S. hits the debt limit and there is a potential government shutdown. The warning followed news that House Speaker Kevin McCarthy, R-Calif. released his plan to raise the debt ceiling by $1.5 trillion for about a year. “Any economic damage could potentially be offset by earlier and/or larger Fed rate cuts. However, the effects of disruptions to the financial system are harder to quantify and could be significant,” Bank of America credit strategist Yuri Seliger said in a note. The central bank has raised its benchmark interest rate nine times over the past year for a total of 4.75 percentage points, the fastest pace of tightening since the early 1980s. It recently signaled one more rate hike in 2023, while saying rate cuts are not its base case. McCarthy said the bill would save American taxpayers more than $4.5 trillion by limiting discretionary spending, retrieving unspent pandemic-related funds, eliminating President Joe Biden’s student loan forgiveness plan and slashing funds earmarked for the Internal Revenue Service. “The impact on IG will depend on the probability of the potential government shut down, and the potential for financial shock should the Treasury miss any debt payments,” Seliger said. Bank of America’s economists estimated that federal expenditures would fall by 5% of GDP per year if the debt limit is not lifted. It’s not clear whether McCarthy has votes within the GOP caucus to pass the bill. McCarthy’s proposal calls for a vote in the House in late May.