By David Morgan

WASHINGTON President Joe Biden and Republican U.S. House Speaker Kevin McCarthy have voiced growing confidence about striking a debt-ceiling deal to avoid a catastrophic default, but they could be tripped up by last-minute opposition from the hardline House Freedom Caucus.

The small but powerful Republican faction warned this week that they could try to block any agreement to raise the $31.4 trillion debt ceiling from passing the House of Representatives, if the accord does not contain "robust" federal spending cuts.

"If the president thinks that there's just going to be some acclamation like - 'Oh, great, yeah! We'll do whatever just to get a deal!' - that's insane, right? We need something that's going to work," said Representative Chip Roy, a prominent Freedom Caucus member.

While there are many variables at play, opposition from the Freedom Caucus could, at a minimum, slow down passage of a bill at a time when the economy can ill afford it, given the Treasury Department's warning that the federal government could be unable to pay all its bills as soon as June 1.

Market optimism about a potential deal has helped U.S. stocks rise over the past two days. Senate Majority Leader Chuck Schumer seemed to share that optimism on Thursday. He said negotiations were making progress and gave senators 24-hours notice to return to Washington for a possible vote on a deal next week.

But the upbeat view could be spoiled if negotiations bog down. Freedom Caucus members are demanding greater spending austerity than some Democrats will accept.

"It's important that it be a robust deal. Something tepid won't do," said Representative Dan Bishop, a Freedom Caucus member.

The caucus issued its official position on Thursday, urging the Democratic-led Senate to enact the Republican debt-ceiling bill that passed the House in April, which would pare discretionary spending to fiscal year 2022 levels and cap future annual growth at 1%.

'NO MORE DISCUSSION'

Official positions require support from at least 80% of the group's membership, which includes at least 37 lawmakers, according to a Reuters tally. Republicans hold a narrow 222-213 majority in the House of Representatives.

"There should be no further discussion until the Senate passes the legislation," the Freedom Caucus statement said. In a tweet, the group added: "No more discussion on watering it down. Period."

Freedom Caucus member Bob Good is one of several hardliners who say they stand ready to oppose bipartisan legislation that fails to meet their goals, despite the risk of a default that could cripple the U.S. economy and unsettle global financial markets.

Good said he believes that Biden and Democrats would adopt the House bill if faced with default, because default would result in a far greater drop in spending for programs Democrats support.

But the prospect of an agreement that could include tougher work requirements and spending cuts for food aid recipients has led to growing frustration among Democrats. This has prompted a group of senators to urge Biden to try to use an untested legal theory to invoke the 14th Amendment to the U.S. Constitution and raise the debt ceiling without Congress.

While a bipartisan deal could still pass despite Freedom Caucus opposition, a split within the Democratic caucus over the right approach could give the faction greater sway in a debt-ceiling vote, especially if the group adopted a formal position that led members to vote en bloc.

With default looming, McCarthy could then be forced to risk his own speakership by relying on Democrats to help increase the debt ceiling.

Members of the Freedom Caucus made McCarthy endure 15 floor votes before being elected to the top House post in January and stood aside only after he agreed to their demands, including a rule allowing a single lawmaker to call for his ouster.

"What we went through back in January was a reflection of Republican voters across the country and their frustration with the Republican Party not delivering," Good said.

(Reporting by David Morgan; Editing by Scott Malone and Cynthia Osterman)