WASHINGTON — Treasury Secretary Janet L. Yellen warned on Friday that she would should begin employing “extraordinary measures” on Thursday to proceed paying the nation’s bills if lawmakers didn’t act to boost the statutory debt limit and that her powers to delay a default may very well be exhausted by early June.
Ms. Yellen’s letter to Congress was the primary sign that resistance by House Republicans to lifting the borrowing cap could put the U.S. economy in danger and signals the start of an intense fight in Washington this yr over spending and deficits.
“Failure to fulfill the federal government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability,” Ms. Yellen wrote.
Ms. Yellen said on Friday that considerable uncertainty surrounded how long she could use measures to delay a default. She said she would begin suspending latest investments within the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Advantages Fund and suspending reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan this month to avoid breaching the debt limit.
The letter is the start of what is predicted to be a protracted and potentially damaging economic fight. Republicans, who assumed control of the House last week, have insisted that any increase to the debt limit be accompanied by significant spending curbs, most certainly including cuts to each the military and domestic issues.
Speaker Kevin McCarthy has cited reducing the national debt — which topped $31 trillion last yr and has increased during each Republican and Democratic administrations, including a few 40 percent increase under former President Donald J. Trump — as a central focus of his party’s agenda.
“The American individuals are those that’s demanding the cut in spending,” Representative Jason Smith, a Missouri Republican and the chairman of the powerful House Ways and Means Committee, said Friday on Fox News. “We now have to have fiscal reforms moving forward. We cannot just give a limiteless bank card.”
Understand the U.S. Debt Ceiling
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What’s the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the full sum of money that the federal government is permitted to borrow via U.S. Treasury securities, similar to bills and savings bonds, to meet its financial obligations. Because the US runs budget deficits, it must borrow huge sums of cash to pay its bills.
Why is there a limit on U.S. borrowing? In keeping with the Structure, Congress must authorize borrowing. The debt limit was instituted within the early twentieth century in order that the Treasury wouldn’t have to ask for permission every time it needed to issue debt to pay bills.
What would occur if the debt limit was hit? Breaching the debt limit would result in a first-ever default for the US, creating financial chaos in the worldwide economy. It will also force American officials to make a choice from continuing assistance like Social Security checks and paying interest on the country’s debt.
On Monday, House Republicans adopted latest rules governing laws that make it tougher to boost the debt limit and strengthen Republicans’ ability to demand that any increase be accompanied by spending cuts. Senate Republicans have also insisted that increases to the debt limit must be tied to “structural spending reform.”
“It’s gone time for Washington to finish the reckless spending of taxpayer dollars and begin living inside its means,” Senator Rick Scott, Republican of Florida, said in an announcement on Friday. “I sit up for working with House Republicans so we are able to stop caving to the Democrats, finally end Biden’s raging inflation crisis and convey fiscal sanity back to Washington.”
Some conservative economists have encouraged the tactics. Kevin A. Hassett, a boss of the White House Council of Economic Advisers under Mr. Trump, warned in a National Review column this week that the full national debt could reach nearly double the dimensions of the annual economy 30 years from now if Congress didn’t stop spending growth.
“Brinkmanship now could be the one thing that may save us from catastrophe,” Mr. Hassett wrote.
Top Democrats said on Friday that Republicans were threatening to break an already fragile economy by risking a default.
“Once more, Republicans are demanding cuts to Medicare, Medicaid and Social Security, and in the event that they don’t get what they need, they’re willing to tank the American economy, destroy a powerful job market and jack up rates of interest and inflation,” said Senator Ron Wyden of Oregon, the chairman of the Senate Finance Committee.
President Biden has said that he’ll refuse to barter over the debt limit, and that Congress must vote to boost it with no strings attached.
Those positions increase the likelihood of a debt limit breach, one that might lead to the US defaulting on its debt for the primary time.
To avoid that, the White Home is increasingly counting on a coalition of bipartisan support to bypass Republican leadership within the House and lift the debt limit.
That group includes the whole Democratic caucus within the House and Senate, plus a handful of Republicans needed to pass bills in each chambers. Such a coalition could employ a rare tactic within the House, called a discharge petition, to force a floor vote on raising the limit. However the move would take weeks and even months to supply a bill that Mr. Biden could sign into law, which could threaten default if lawmakers misjudge the date when Treasury can now not pay the nation’s bills.
The closer the country gets to a possible default, the more damage the economy is more likely to incur. Brinkmanship between congressional Republicans and President Barack Obama in 2011 resulted in higher borrowing costs for businesses and residential buyers, together with plunges in stock markets and consumer confidence. An actual default could shock the economy into recession, as many government bills went unpaid, and saddle the nation with significantly higher borrowing costs for years to come back.
After a protracted standoff in late 2021, Congress agreed to boost the borrowing cap to $31 trillion. Ms. Yellen has warned that breaching the debt limit and defaulting would do irreparable harm to the economy. She has dismissed suggestions and theories that the Treasury Department or the White House could lift the borrowing cap unilaterally as unrealistic and has called previously for the whole mechanism to be abolished.
“I respectfully urge Congress to act promptly to guard the complete faith and credit of the US,” Ms. Yellen wrote in her letter.
White House and Treasury officials have repeatedly made the case that raising the debt limit merely allows the federal government to spend money that Congress has already authorized and that doing so isn’t an indication of fiscal recklessness.
Karine Jean-Pierre, the White House press secretary, repeated on Friday that Mr. Biden wouldn’t negotiate with Republicans on the debt limit and expected Congress to boost it in a bipartisan vote.
“This must be kept away from conditions,” she said at a day press briefing. “There’s going to be no negotiation over it. That is something that must get done.”
Despite Ms. Yellen’s warning, many analysts and policymakers consider that a deal on the debt limit will ultimately be reached before it is just too late.
“Today’s notification from the Treasury Department is notable, but not cause for panic,” said Shai Akabas, the director of economic policy on the Bipartisan Policy Center. “It’s, nonetheless, time for each parties to get serious about negotiations.”
He added, “On this time of ongoing inflation and economic anxiety, the very last thing the American people need is the tumult of a back-against-the-wall debt limit fight or, much worse, a default on our obligations.”
Wall Street analysts consider that House Republicans could ultimately save face and choose an answer that will “suspend” the debt limit to a certain date without actually raising the borrowing cap to a selected level. This tactic, which was employed by former Speaker John A. Boehner in 2013 and 2014, would give the Treasury Department the leeway to maintain the federal government running.
“At the moment, unable to secure a selected dollar increase within the debt ceiling, Boehner got here up with the thought of a ‘suspension’ of the debt ceiling through a selected date,” Henrietta Treyz, the director of economic policy at Veda Partners, an investment advisory firm, wrote in a note to clients this week. “This avoided Congress voting on a net budget increase authorization and as a substitute ceded authority to the Treasury Department to do essentially whatever it needed to do through a selected date.”
Kristalina Georgieva, the managing director of the International Monetary Fund, told reporters on Thursday that she was hopeful that lawmakers would avoid a crisis over the debt limit this yr.
“The discussions of debt limits are at all times quite intense,” Ms. Georgieva said. “History teaches us that ultimately, an answer is being found.”