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WASHINGTON — Treasury Secretary Janet L. Yellen warned on Friday that she would have to begin employing “extraordinary measures” to continue paying the nation’s bills this month if lawmakers do not act to raise the statutory debt limit and that her powers to delay a default could be exhausted by early June.
Ms. Yellen’s letter to Congress was the first sign that resistance by House Republicans to lifting the borrowing cap could put the U.S. economy at risk and signals the beginning of an intense fight in Washington this year over spending and deficits.
“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,” Ms. Yellen wrote.
The Treasury secretary said that there is considerable uncertainty surrounding how long she can use measures to delay a default and that she would keep Congress abreast of the fiscal situation. Ms. Yellen said that she would begin suspending new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund and suspending reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan later this month to avoiding breaching the debt limit.
The letter marks the beginning of what’s expected 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, likely including cuts to both spending on the military and on domestic issues not related to national defense.
Understand the U.S. Debt Ceiling
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What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the United States runs budget deficits, it must borrow huge sums of money to pay its bills.
Why is there a limit on U.S. borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so that the Treasury would not need to ask for permission each time it had to issue debt to pay bills.
What would happen if the debt limit was hit? Breaching the debt limit would lead to a first-ever default for the United States, creating financial chaos in the global economy. It would also force American officials to choose between continuing assistance like Social Security checks and paying interest on the country’s debt.
House Speaker Kevin McCarthy has cited reducing the national debt — which topped $31 trillion last year and has increased during both Republican and Democratic administrations — as a central focus of his agenda.
“One of the greatest threats we have to this nation is our debt,” Mr. McCarthy said on Fox News on Tuesday evening, adding, “We don’t want to just have this runaway spending.”
On Monday, House Republicans adopted new rules governing legislation that make it more difficult to raise the debt limit and strengthen Republicans’ ability to demand that any increase be accompanied by spending cuts.
President Biden has said that he will refuse to negotiate over the debt limit, and that Congress must vote to raise it with no strings attached.
Those positions increase the likelihood of a debt limit breach, one that could result in the United States defaulting on its debt for the first time in history.
The country has already come close, including in 2011, when former President Barack Obama and Republicans agreed to an 11th-hour deal to avert a debt limit breach.
After a protracted standoff in late 2021, Congress agreed to raise the borrowing cap to $31 trillion. Ms. Yellen has warned that breaching the debt limit and defaulting would cause a deep recession and do irreparable harm to the United States 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 entire mechanism to be abolished.
“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” Ms. Yellen wrote in the letter.
Karine Jean-Pierre, the White House press secretary, repeated on Friday that Mr. Biden will not negotiate with Republicans on the debt limit and expects Congress to raise it in a bipartisan vote.
“This should be done without conditions,” she said at an afternoon press briefing. “There is going to be no negotiation over it. This is something that must get done.”
Despite Ms. Yellen’s warning on Friday, many analysts and policymakers believe that a deal on the debt limit will ultimately be reached before it is too late.
“Today’s notification from the Treasury Department is notable, but not cause for panic,” said Shai Akabas, Director of Economic Policy at the Bipartisan Policy Center. “It is, however, time for both parties to get serious about negotiations.”
He added: “In this time of ongoing inflation and economic anxiety, the 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.”
Kristalina Georgieva, the managing director of the International Monetary Fund, told reporters on Thursday that she was hopeful that a crisis over the debt limit will be avoided this year.
“The discussions of debt limits are always quite intense,” Ms. Georgieva said. “History teaches us that in the end, a solution is being found.”