Treasury Secretary Janet Yellen on Friday warned that the United States is expected to hit the debt ceiling on Thursday, Jan. 19, and once the limit is reached, the Treasury “will need to start taking certain extraordinary measures” to prevent the country from defaulting on its debts.
Lawmakers took action in late 2021 to increase the debt ceiling, which currently sits at roughly $31.4 trillion. The debt limit could present the first major battle of a divided Washington, with a Republican-controlled House breaking with two years of Democratic control of both chambers of Congress and the White House.
Yellen sounded the alarm in a letter addressed to newly minted House Speaker Kevin McCarthy and sent to other Congressional leaders, calling it “critical” for lawmakers “to act promptly to protect the full faith and credit of the United States.”
“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,” Yellen wrote. “Indeed, in the past, even threats that the U.S. government might fail to meet its obligations have caused real harms, including the only credit rating downgrade in the history of our nation in 2011.”
Past forecasts suggest a default could instantly bury the country in a deep recession, right at a moment of slowing global growth as the U.S. and much of the world face high inflation because of the pandemic and Russia’s invasion of Ukraine.
The extraordinary actions that Yellen can take, according to her letter, include delaying some payments, such as contributions to federal employees’ retirement plans, in order to provide some headroom to make other payments that are deemed essential, including those for Social Security and debt instruments.
Even still, Yellen wrote, the time those extraordinary measures would last is “subject to considerable uncertainty.”
“While Treasury is not currently able to provide an estimate of how long extraordinary measures will enable us to continue to pay the government’s obligations, it is unlikely that cash and extraordinary measures will be exhausted before early June,” she added.
Asked about the issue on Friday, White House press secretary Karine Jean-Pierre said the administration would not be doing “any negotiation” on the debt ceiling, but she added that legislative aides within the White House were already doing regular outreach to new lawmakers.
“In the past … there’s been a bipartisan cooperation when it comes to lifting the debt ceiling, and that’s how it should be. That’s how it should continue,” she said. “It’s not and should not be a political football.”
“This is something that must get done,” she added.
Yellen’s announcement will no doubt hasten discussions about addressing the debt limit, which has loomed over Congress since Republicans took back control of the House in January. Speaker McCarthy has said that Republicans want to tie any agreement to raise the debt ceiling to spending cuts, a reduction of the national debt or other concessions from their Democratic colleagues.
“One of the greatest threats we have to this nation is our debt,” McCarthy said on Fox News on Tuesday, adding that he has “already spoken” to President Biden about the debt ceiling issue.
“Let’s sit down now, let’s find a way to both come together to curb the rising debt that we have,” McCarthy told the outlet, adding: “This is our moment to change the behavior.”
The new House new speaker stopped short of saying Republicans would go so far as to refuse to pass the annual spending bills needed to fund the government, as happened more than a decade ago during an earlier debt ceiling showdown in Congress. A razor-thin Republican majority – and a new rule that allows any lawmaker to trigger a vote for McCarthy’s removal – could make even the most urgent of votes a dicey matter.
“We’re going to look at every single dollar spent,” McCarthy said.
The Democratic leaders in Congress – Senate Majority Leader Chuck Schumer, D-N.Y., and House Minority Leader Hakeem Jeffries – issued a statement urging their colleagues to move “quickly” to address the debt limit.
“Democrats want to move quickly to pass legislation addressing the debt limit so there is no chance of risking a catastrophic default,” they wrote in a statement. “We’ve seen in previous debt ceiling stand-offs that even the threat of default leads to even higher costs for working families.”
“The debt limit was increased in a bipartisan way three times when Donald Trump was President, twice when Republicans had majorities in the House and Senate,” the Democratic leaders wrote. “This time should be no different.”
The White House has ruled out executive action to stave off a default.
“Congress is going to need to raise the debt limit without — without — conditions, and it’s just that simple,” White House press secretary Karine Jean-Pierre said recently. “Attempts to exploit the debt ceiling as leverage will not work. There will be no hostage taking.”
If the government were to default, financial markets could be expected to crash. Several million workers could be laid off. The world could feel the aftershocks of the crisis for years to come. Moody’s Analytics called this risk “cataclysmic” in a 2021 forecast ahead of the previous debt ceiling increase, suggesting that the resulting chaos would be due to government dysfunction, rather than the underlying health of the U.S. economy.
