WASHINGTON — Treasury Secretary Janet Yellen said the department will begin taking special accounting maneuvers on Jan. 19 to avoid breaching the U.S. debt limit, urging lawmakers to boost the ceiling to avert a devastating payments default.
“The period of time that extraordinary measures may last is subject to considerable uncertainty,” Yellen wrote in a letter to bipartisan congressional leaders Friday. Still, “it is unlikely that cash and extraordinary measures will be exhausted before early June,” she said.
The letter kicks off what is likely to be a prolonged, intense political battle over US fiscal policy, a showdown that could strain financial markets and elevate dangers for an economy already facing the risk of recession. Economists expect the Treasury will run out of cash around August if the debt ceiling isn’t boosted.
The House’s Republican leaders say they’ll insist on spending cuts in return for agreeing to boost the debt limit. But Democrats, who control the Senate, and President Joe Biden reject such “hostage-taking” maneuvers and want a straightforward increase, such as Congress offered former GOP President Donald Trump.
The current debt limit, or the total debt the Treasury can issue to the public and other government agencies, is just under $31.4 trillion. It was set in December 2021, when Congress raised it by $2.5 trillion.
Currently, the government is roughly $78 billion away from reaching the limit.
In her letter, Yellen said the Treasury’s extraordinary measures would begin by redeeming existing — and suspending new — investments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. The department will also suspend reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan.
Those funds will be made whole after the impasse on Capitol Hill ends, Yellen said, appealing to lawmakers to prevent a standoff from threatening U.S. finances and financial markets.
It’s “critical that Congress act in a timely manner to increase or suspend the debt limit,” she wrote. “Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability.”
Should the Treasury become unable to issue fresh debt and then run out of cash, the U.S. government would default on its financial obligations. Wall Street analysts say the risk of default doesn’t really loom until the second half of 2023, after the extraordinary measures the Treasury uses to avoid exceeding the cap are exhausted.
“This is about the United States government honoring the obligations that prior Congresses have already made,” Brian Deese, director of the White House’s National Economic Council, said in a Bloomberg Television interview Friday. “It’s a sacred obligation — the full faith and credit of the United States — and Congress is going to have to deal with the debt limit, and do so without conditions, without games and without putting our economy at risk.”
Yellen said during the 2021 fights over the debt limit that federal contractors and employees would go unpaid and Social Security checks would stop, among other things. Unless their payments were prioritized, investors in Treasury securities wouldn’t receive interest payments or get back their principal on maturing bills, notes and bonds.
Some economists and bond strategists are warning of the kind of turmoil seen in 2011, when a debt-ceiling standoff saw S&P Global Ratings downgrade the sovereign U.S. rating from AAA. Equities tumbled around the world, and U.S. consumer confidence was hit, undermining the post-financial-crisis economic recovery.
Lawrence Summers, one of Yellen’s predecessors as Treasury chief, said earlier Friday that fights over the debt limit are the “dumbest” in Washington, given how vital it is to honor U.S. obligations.
“A default would be a catastrophe — it would mean higher borrowing costs forever,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television.
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(Bloomberg News writer Justin Sink contributed to this article.)
