Yellen Warns of ‘Catastrophic’ Consequences From
Debt Limit Breach
The Treasury secretary, testifying alongside Jerome H.
Powell, the Federal Reserve chair, implored Congress to raise or suspend the
nation’s borrowing cap before an Oct. 18 deadline.
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Failure to
Raise Debt Limit Would be ‘Catastrophic,’ Yellen Says
Treasury
Secretary Janet L. Yellen warned lawmakers that if Congress did not raise or
suspend the statutory debt limit by Oct. 18, the country would default for the
first time in history, prompting a “self-inflicted” financial crisis.
It is
imperative that Congress address the debt limit, if not, our current estimate
is the Treasury will likely exhaust its extraordinary measures by Oct. 18. At
that point, we expect Treasury would be left with very limited resources that
would be depleted quickly — America would default for the first time in
history. The full faith and credit of the United States would be impaired, and
our country would likely face a financial crisis and economic recession as a
result. It’s necessary to avert a catastrophic event for our economy. Senators,
the debt ceiling has been raised or suspended 78 times since 1960, almost
always on a bipartisan basis. My hope is that we can work together to do so
again, and to build a stronger American economy for future generations.
Absolutely, it’s true that the interest payments on the government debt would
increase. I would be concerned that the dollar and Treasury assets, which are
regarded as the most secure in the world and serve as the basis for the dollar
to be the reserve currency that it would undermine confidence in. the dollar as
a reserve currency, and the interest payments of ordinary Americans on their
mortgages and on their cars and on their credit cards would all go up in line
with higher Treasury borrowing costs. This would be a manufactured crisis we
had imposed on this country which has been going through a very difficult
period, is on the road to recovery, and it would be a self-inflicted wound of
enormous proportions.
Treasury
Secretary Janet L. Yellen warned lawmakers that if Congress did not raise or
suspend the statutory debt limit by Oct. 18, the country would default for the
first time in history, prompting a “self-inflicted” financial
crisis.CreditCredit...Stefani Reynolds for The New York Times
Alan
RappeportEmily CochraneJeanna Smialek
By Alan
Rappeport, Emily Cochrane and Jeanna Smialek
Sept. 28,
2021
https://www.nytimes.com/2021/09/28/business/economy/yellen-powell-senate.html
WASHINGTON
— Treasury Secretary Janet L. Yellen warned lawmakers on Tuesday of
“catastrophic” consequences if Congress failed to raise or suspend the
statutory debt limit in less than three weeks, saying inaction could lead to a
self-inflicted economic recession and a financial crisis.
At a Senate
Banking Committee hearing where she testified alongside the Federal Reserve
chair, Jerome H. Powell, Ms. Yellen laid out in explicit terms what she expects
to happen if Congress does not deal with the debt limit before Oct. 18, which
the Treasury now believes is when the United States will actually face default.
In her most public expression of alarm about the matter, she described the
standoff within Congress as a self-inflicted wound of enormous proportions.
Her
warnings came as the stock market suffered its worst day since May, as investors
fretted over a cocktail of concerns, including the potential for the government
to shut down and default on its debt, persistent inflation, the Delta variant
and the Fed’s plans to soon withdraw some economic support. The S&P 500
fell 2 percent and yields on government bonds spiked to their highest level
since June, reflecting expectations that the Fed will begin to slow its bond
purchases as prices rise and the economy heals.
Congress
was scrambling to figure out how to resolve its two immediate problems: funding
the government past Thursday and raising the debt limit so that the United
States can continue borrowing money to pay its bills.
After
Senate Republicans on Monday blocked an emergency spending bill that would have
funded the government through early December and lifted the debt limit,
Democrats huddled privately to discuss their options but have not settled on a
solution.
In a phone
call on Monday, Democratic congressional leaders spoke with President Biden
about the possibility of steering around Republican opposition and raising the
debt ceiling unilaterally. They could do so by using a fast-track process known
as reconciliation that shields fiscal legislation from a filibuster — the same
maneuver they are employing to push through their sprawling social policy and
climate change bill. But Democrats have publicly resisted that option, which
would be complex and time-consuming, and would most likely force them to cast a
series of politically tricky votes on an array of issues.
Ms. Yellen
warned that the effects of inaction would be felt across the economy: Older
adults could see their Social Security payments delayed, soldiers would not
know when their paychecks were coming and interest rates on credit cards, car
loans and mortgages would rise, making payments more costly, she said. And she
suggested that a default would jeopardize the dollar’s status as the
international reserve currency, which Democrats argue would be a gift to China.
“It would
be disastrous for the American economy, for global financial markets, and for
millions of families and workers whose financial security would be jeopardized
by delayed payments,” Ms. Yellen said.
America’s
two top economic policymakers also warned lawmakers on Tuesday that the Delta
variant of the coronavirus had slowed the economic recovery, though they
expressed optimism that the economy would continue to strengthen.
Their
testimony came at a critical moment in the recovery. Businesses are facing
labor shortages and consumers are coping with rising prices amid a resurgent
pandemic. Inflation has been rapid this year, climbing by 4.2 percent in the
year through July, and it threatens to remain high for some time.
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Skyrocketing
shipping costs and global factory shutdowns caused by the coronavirus have been
a major driver of this year’s price increases. Cars in particular have been in
limited supply amid a semiconductor shortage, and recent comments from auto
industry leaders and analyst reports have suggested that may not be resolved
quickly. A Bloomberg index that tracks various commodity prices — including
those tied to oil, gas, metals, sugar and coffee — hovered at its highest level
in a decade on Tuesday. Higher raw material expenses can feed into steeper
prices for the things people consume every day.
“Inflation
is elevated and will likely remain so in coming months before moderating,” Mr.
Powell told lawmakers.
Jitters
about China, which has so far been reluctant to bail out the teetering
Evergrande Group, a beleaguered residential developer with $300 billion in
debt, along with the possibility of persistent inflation in the United States,
helped tank sentiment on Wall Street on Tuesday.
“Nerves, as
far as inflation expectations, have really started to take over,” said Fiona
Cincotta, a senior financial markets analyst at Forex.com. “We’ve seen this
before, but they’re back because inflation might not be as transitory as
central banks initially thought.”
Investors
are waking up to the reality that Mr. Powell’s Fed is poised to provide less
support to markets and the economy in the coming months, both because inflation
has moved up and because the labor market is healing. The central bank signaled
clearly last week that it could as soon as November announce a plan to pare
back the $120 billion in government-backed security purchases it has been
making each month.
Those
purchases tend to push yields on longer-run government bonds lower and stock
prices higher — and their removal can have the opposite effect. Key government
bond rates rose sharply on Tuesday, the sort of move that ripples through the
economy and makes it more expensive for large companies to borrow and operate.
The risks
to markets and economic growth are only compounded by political uncertainty
emanating from Washington.
Ms. Yellen,
speaking later on Tuesday to the National Association for Business Economics,
suggested a dysfunctional Congress could pose a graver economic threat than the
pandemic.
“A
government shutdown would impair our ability to respond to the pandemic and
disrupt normal government operations,” she said. “As painful as this would be,
failing to address the debt limit and defaulting on our national obligations
would be far worse — likely provoking a historical financial collapse and
causing our economy to fall into recession.”
Democrats
continued searching for politically palatable options, with Senator Chuck
Schumer, the majority leader, trying on Tuesday to unilaterally waive the
procedural 60-vote threshold to pass a debt ceiling increase with a simple
majority. He framed it as “a way out” for the Senate to address the looming
deadline, without requiring Republican votes.
“If
Republicans want to abscond from their responsibilities — not vote to pay the
debt they incurred — so be it,” he declared on the Senate floor. “That’s a bad
thing, that’s a bad precedent. But this is the way out. It is a way out.”
But such a
maneuver required agreement from all 100 senators, and Senator Mitch McConnell
of Kentucky, the minority leader, blocked Mr. Schumer’s effort.
The House
could vote as early as Wednesday on a stand-alone bill raising the debt limit,
but that would fail to clear a Republican filibuster.
The debt
limit deadline was technically reached on Aug. 1, after a two-year suspension
that Congress agreed to in 2019. Since then, Ms. Yellen has been taking
temporary steps to delay a default.
Cutting it
close to the deadline could still have economic costs even if Congress narrowly
avoids a default. James Lucier of Capital Alpha Partners, a markets research
firm, said on Tuesday that approaching a potential cutoff of new Treasury
issuances could create liquidity problems in the fixed-income markets that
depend on them for collateral.
“One way or
another, the problem needs to be fixed,” Mr. Lucier said.
Ms. Yellen
told lawmakers that the Treasury Department was likely to exhaust the
“extraordinary measures” she has been employing to delay a default if Congress
has not acted by Oct. 18. It was the most specific date that has been offered
by the Treasury, which has said that pandemic relief payments have made it
harder than usual to predict how much cash the government has available.
“At that
point, we expect Treasury would be left with very limited resources that would
be depleted quickly,” she wrote. “It is uncertain whether we could continue to
meet all the nation’s commitments after that date.”
For weeks,
Ms. Yellen has been quietly pressing lawmakers to put politics aside and ensure
that the United States can continue to meet its fiscal obligations. She has
been in touch with Wall Street chief executives and former Treasury secretaries
as she looks to keep markets calm and find allies who can help her make the
case to recalcitrant Republicans, who believe Democrats must deal with the debt
limit on their own.
“It is
imperative that Congress swiftly addresses the debt limit,” Ms. Yellen said.
“The full faith and credit of the United States would be impaired, and our
country would likely face a financial crisis and economic recession.”
The debt
limit is traditionally addressed on a bipartisan basis, but Republicans are
refusing to join Democrats in passing legislation to lift the borrowing cap.
Republicans argue that Democrats have the votes to lift the limit on their own
and that they should do so. Democrats argue that Republicans are playing a
dangerous political game.
In a tense
exchange with Senator John Kennedy, Republican of Louisiana, Ms. Yellen said it
was possible that Democrats could lift the debt limit on their own but that
Republicans were shirking their responsibility by refusing to cover debts they
helped incur.
“It is very
important to recognize that raising the debt ceiling is about paying bills that
Congress has incurred in the past,” Ms. Yellen said, noting that deficits had
been run under Democratic and Republican administrations. “It’s a shared
responsibility.”
Mr.
Kennedy, who was unconvinced, said that Democrats just wanted to tie
Republicans to their big spending plans and that a crisis could be averted by
Democrats.
“Easy,
peasy. Finished. Let’s go have a cocktail,” he told Ms. Yellen.
Alan
Rappeport is an economic policy reporter, based in Washington. He covers the
Treasury Department and writes about taxes, trade and fiscal matters. He
previously worked for The Financial Times and The Economist. @arappeport
Emily
Cochrane is a reporter in the Washington bureau, covering Congress. She was
raised in Miami and graduated from the University of Florida. @ESCochrane
Jeanna
Smialek writes about the Federal Reserve and the economy for The New York
Times. She previously covered economics at Bloomberg News. @jeannasmialek
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