Treasury Secretary Janet Yellen warned congressional leadership on Monday that the federal government could face a debt default in less than three weeks if an agreement on the debt ceiling is not quickly reached with President Joe Biden.
The debt ceiling, a policy that prevents the federal government from spending beyond a predetermined national debt limit of $31.4 trillion, surpassed the threshold earlier this year. Yellen said in her letter to lawmakers that the Treasury Department expects to default on obligations as early as June 1 unless the debt limit is either suspended or increased.
“We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States,” she wrote. “In fact, we have already seen Treasury’s borrowing costs increase substantially for securities maturing in early June.”
Yellen added that the exact date of the debt default is “impossible to predict,” although the June 1 estimate is based on federal receipt, outlay, and debt data.
“If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests,” she continued. “I continue to urge Congress to protect the full faith and credit of the United States by acting as soon as possible.”
The letter from Yellen, which is one of several similar alerts she has issued regarding the consequences of a debt default, comes days after the Congressional Budget Office warned in a report that the “extent to which the Treasury will be able to fund the government’s ongoing operations will remain uncertain throughout May.” The document added that the “extraordinary measures” officials have used to fund operations could expire “at some point in the first two weeks of June.”
House Speaker Kevin McCarthy (R-CA), House Minority Leader Hakeem Jeffries (D-NY), Senate Majority Leader Chuck Schumer (D-NY), and Senate Minority Leader Mitch McConnell (R-KY), the leaders to whom Yellen addressed her letter, have negotiated in recent days with officials from the Biden administration about possible mechanisms to amend the debt limit. Disagreements center on whether the move will occur with spending reforms and budget cuts.
Members of the House Freedom Caucus, a bloc of conservatives without which McCarthy is unable to pass legislation due to the narrow Republican majority in the House, have said they would vote to raise the debt ceiling in exchange for a framework that returns expenditures to fiscal year 2022 levels, increase the debt limit only for the next year, and cap annual spending growth at 1% over the next decade. The budget proposal unveiled by McCarthy mirrored the framework and successfully passed through the House last month alongside a one-year increase in the debt ceiling.
Biden is slated to meet with Democratic and Republican leaders for a second time on Tuesday. “I really think there’s a desire on their part, as well as ours, to reach an agreement, and I think we’ll be able to do it,” the commander-in-chief told reporters over the weekend. McCarthy, on the other hand, told reporters that the two sides are still “far apart” and contended that the administration is “not talking anything serious.”
A default would likely cause a recession as the federal government, a major borrower of funds that investors across the world broadly consider to be stable, neglects to repay obligations. The national debt, which now surpasses $31.7 trillion, is meanwhile a source of persistent financial risk and a damper on long-term economic growth.