Treasury Secretary Janet Yellen told Congress that the Treasury would be unable to pay all of the government’s bills if lawmakers don’t raise the federal borrowing limit by October 18.
“At that point, we expect Treasury would be left with very limited resources that would be depleted quickly. It is uncertain whether we could continue to meet all the nation’s commitments after that date,” she said in a letter to congressional leaders on Tuesday morning.
Senate Republicans on Monday blocked a Democratic bill that would both fund the government and raise the borrowing limit, escalating a political showdown over the government’s finances just days before it runs out of money.
Senate Democrats sought to pass a House-approved stopgap measure that funds the government through Dec. 3, 2021, and suspends the debt limit through Dec. 16, 2022. They are racing to send the legislation to President Biden’s desk before the government’s current funding expires at 12:01 a.m. Oct. 1, one of several big-ticket topics that lawmakers are juggling this week.
The failure of the procedural vote Monday could prompt Democrats to decouple the short-term spending measure and the debt-limit vote, to avoid the risk of a government shutdown at the end of the week. The letter from Ms. Yellen makes clear that lawmakers would only have 18 days after that to approve a debt limit suspension before the Treasury could begin to miss payments on its obligations, triggering a default that could send markets into a tailspin.
The Treasury has been using emergency measures to conserve cash since Aug. 1, when the debt limit was reinstated after a two-year suspension. Ms. Yellen has warned lawmakers for months that the government could exhaust those measures sometime this fall, and said earlier this month that the date could come as early as October. Tuesday’s letter is the first time she has provided a specific estimate for the so-called X-date.
Ms. Yellen restated a plea for lawmakers to agree to raise the debt limit, which doesn’t approve new spending but instead allows the government to pay bills it has already agreed to incur, in her testimony Tuesday before the Senate Banking Committee, where she is set to appear alongside Fed Chairman Jerome Powell.
Ms. Yellen said the U.S. “would likely face a financial crisis and economic recession” if the Treasury can’t repay bondholders as debts mature. “It is imperative that Congress swiftly addresses the debt limit. If it does not, America would default for the first time in history,” she said.
Senate Republicans have lined up against the debt limit increase, saying that Democrats, as the party in power, should raise the ceiling themselves. Democrats have emphasized that lifting the debt limit is a shared responsibility of both parties, and said votes to lift the debt ceiling during the Trump administration were bipartisan.
Separately, Ms. Yellen said the U.S. economy is in the middle of a “fragile but rapid recovery” from the recession caused by the coronavirus pandemic in March 2020. Ms. Yellen said despite a recent slowdown in hiring and consumer spending due to the Delta variant of the coronavirus, she said she still expected the labor market to return to full employment next year.
Policy makers have faced an unexpected burst of much stronger-than-anticipated inflation this year, which has complicated the outlook for interest rates over the coming years. The Fed last week indicated it was likely to begin reversing its pandemic stimulus policies at its next meeting, Nov. 2-3, by gradually reducing its purchases of $120 billion a month in government securities and mortgage bonds.
Fed Chairman Jerome Powell indicated in testimony for Tuesday’s hearing that the surge in inflation this year, driven largely by supply-chain bottlenecks and other challenges related to reopening the economy, has been larger and more enduring than anticipated. Inflation has surged to more than 4% in recent months, using the Fed’s preferred gauge, but Mr. Powell said he believed prices would eventually return to the central bank’s 2% goal.
Ms. Yellen’s Treasury Department, meanwhile, has been tasked with spending billions of dollars in rental aid and assistance to state and local governments. Some of those programs have faced difficulties getting federal relief money to recipients, and too much aid “remains bottlenecked at the state and local levels,” said Ms. Yellen. She encouraged states and municipalities to speed the distribution of federal aid to eligible renters and landlords.
Write to Nick Timiraos at [email protected] and Kate Davidson at [email protected]
Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
