WASHINGTON – Treasury Secretary Janet L. Yellen on Tuesday warned lawmakers of “catastrophic” consequences if Congress does not raise or suspend the statutory debt ceiling in less than three weeks, saying inaction could lead to a self-inflicted economic recession and financial crisis.
At a Senate Banking Committee hearing where she testified with Federal Reserve Chairman Jerome H. Powell, Ms. Yellen set out what to expect if Congress did not deal with the debt ceiling before October 18 The Treasury Department now believes the United States is indeed facing a default. In her most public statement on the matter, she described the stalemate within Congress as a self-inflicted wound of enormous proportions.
Their warnings came as the stock market had its worst day since May, when investors worried about a cocktail of concerns including the possible government shutdown and bankruptcy, persistent inflation, the delta option, and the Fed’s plans to soon-one Withdraw some of the economic support. The S&P 500 fell 2 percent and government bond yields rose to their highest level since June, reflecting expectations that the Fed will curb bond purchases as prices rise and the economy recovers.
Congress sought to resolve its two immediate problems: funding the government last Thursday and raising the debt ceiling so the United States could continue to borrow money to pay its bills.
After Senate Republicans blocked an emergency spending bill on Monday that would have funded the government through early December and lifted the debt ceiling, Democrats rallied privately to discuss their options but failed to agree on a solution.
In a phone call on Monday, Democratic Congress leaders spoke to President Biden about the possibility of bypassing the Republican opposition and unilaterally raising the debt ceiling. They could do this using an expedited process known as reconciliation that protects tax laws from a filibuster – the same maneuver they use to enforce their sprawling social policy and climate change laws. But the Democrats have publicly opposed this option, which would be complex, time consuming, and most likely would force them to cast a number of politically sensitive votes on a range of issues.
Ms. Yellen warned that the effects of inactivity were being felt across the economy: older adults could see their social security payments being delayed, soldiers would not know when their paychecks were due, and interest rates on credit cards, car loans and mortgage payments would rise more expensive, she said. And she suggested that defaulting on it would jeopardize the dollar’s status as an international reserve currency, which Democrats believe would be a gift to China.
“It would be catastrophic for the American economy, for global financial markets, and for millions of families and workers whose financial security would be compromised by late payments,” Yellen said.
America’s two top economic leaders also warned lawmakers on Tuesday that the delta variant of the coronavirus had slowed economic recovery, but were optimistic that the economy would continue to pick up.
Her testimony came at a critical time in recovery. Businesses face labor shortages and consumers struggle with rising prices amid a resurgent pandemic. Inflation was so rapid that year 4.2 percent increase in the year to July and threatens to remain high for some time to come.
Rising shipping costs and worldwide factory closures due to the coronavirus were a major driver of this year’s price increases. Cars in particular were limited in availability due to a semiconductor shortage, and recent comments from Leading the auto industry and Analyst reports have suggested that this may not be resolved quickly. A Bloomberg index that tracks various commodity prices – including those pegged to oil, gas, metals, sugar, and coffee – floated on his highest level in a decade on Tuesday. Higher raw material costs can lead to steeper prices for the things people consume on a daily basis.
“Inflation is up and is likely to remain so for the months ahead before it eases,” Powell told lawmakers.
Nervousness over China, which has so far been reluctant to bail out the volatile Evergrande Group, a troubled residential developer with $ 300 billion in debt, along with the possibility of continued inflation in the US, contributed to sentiment on Tuesday to calm down Wall Street.
“The nerves about inflation expectations have really started to get the better of them,” said Fiona Cincotta, a senior financial analyst at Forex.com. “We’ve seen this before, but they’re back because inflation may not be as transitory as central banks initially thought.”
Investors are becoming aware that Mr Powell’s Fed stands ready to provide less support to markets and the economy in the coming months, both because inflation has risen and because the labor market is recovering. The central bank made clear signals last week that it could announce a plan to cut government-sponsored asset purchases by $ 120 billion a month as early as November.
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These purchases tend to drive down longer-term government bond yields and drive stock prices higher – and if they do not, it can have the opposite effect. Treasury bond rates rose sharply on Tuesday, a type of movement that is spreading through the economy, making it more expensive for large corporations to borrow and operate.
The risks to markets and economic growth are only exacerbated by the political uncertainty emanating from Washington.
Ms. Yellen, speaking to the National Association for Business Economics later Tuesday, suggested that a dysfunctional Congress could pose a more serious economic threat than the pandemic.
“A government shutdown would affect our ability to respond to the pandemic and disrupt normal government operations,” she said. “As painful as this may be, it would be much worse to fail to meet the debt ceiling and our national commitments – which is likely to provoke historic financial collapse and plunge our economy into recession.”
The Democrats continued to seek politically palatable options, with Senator Chuck Schumer, majority leader, attempting unilaterally on Tuesday to lift the procedural 60-vote threshold to allow a simple majority vote to raise the debt ceiling. He called it a “way out” for the Senate to meet the looming deadline without requiring Republican votes.
“If Republicans want to shirk their responsibilities – not vote to pay off the debts they incurred – so be it,” he said in the Senate. “This is a bad thing, this is a bad precedent. But that’s the way out. It’s a way out. “
But such a maneuver required the approval of all 100 senators, and Senator Mitch McConnell of Kentucky, the minority leader, blocked Mr. Schumer’s efforts.
The House of Representatives could vote on a stand-alone bill to raise the debt ceiling as early as Wednesday, but that wouldn’t eliminate a Republican filibuster.
The debt ceiling deadline was technically reached on August 1, after a two-year suspension that Congress approved in 2019. Since then, Ms. Yellen has taken temporary steps to delay a default.
Shortening the deadline could still generate economic costs even if Congress narrowly avoids default. James Lucier of Capital Alpha Partners, a market research firm, said Tuesday that the approach to a potential lockdown of new government bond issues could create liquidity problems in the bond markets that rely on them as collateral.
“The problem has to be fixed one way or the other,” said Lucier.
Ms. Yellen told lawmakers that if Congress failed to act by October 18, the Treasury Department will likely exhaust the “extraordinary measures” she has taken to delay a default. It was the most accurate date offered by the Treasury Department. which says pandemic relief payments have made it harder than usual to predict how much government cash is available.
“At this point we assume that the treasury is left with very limited resources that are quickly depleted.” She wrote. “It is uncertain whether we will be able to continue fulfilling all of the nation’s commitments after that date.”
For weeks, Ms. Yellen has been quietly urging lawmakers to put politics aside and ensure that the United States can continue to meet its fiscal obligations. She has reached out to Wall Street chiefs and ex-Treasury officials to keep markets calm and find allies who can help her crack down on recalcitrant Republicans who believe the Democrats will have to tackle the debt ceiling on their own.
“It is imperative that Congress quickly address the debt ceiling,” said Ms. Yellen. “The full confidence and creditworthiness of the United States would be compromised and our country would likely face a financial crisis and economic recession.”
The debt ceiling is traditionally bipartisan, but Republicans are refusing to join the Democrats in passing a law to lift the credit ceiling. Republicans argue that the Democrats have the votes to lift the border themselves, and that they should do so. The Democrats argue that the Republicans are playing a dangerous political game.
In a tense exchange with Senator John Kennedy, Republican of Louisiana, Ms. Yellen said it was possible the Democrats could raise the debt ceiling themselves, but Republicans would shirk their responsibility by refusing to pay the debt that they had included.
“It is very important to realize that raising the debt ceiling is about paying bills that Congress has incurred in the past,” said Ms. Yellen, noting that deficits have been run under Democratic and Republican governments. “It’s a shared responsibility.”
Kennedy, unconvinced, said that the Democrats just wanted to keep the Republicans bound by their grand spending plans and that a crisis could be averted by the Democrats.
“Easy as pie. Ready. Let’s go have a cocktail,” he said to Ms. Yellen.
