Yellen says failure on debt limit could be ‘catastrophic’

Treasury Secretary Janet Yellen on Tuesday warned lawmakers of “catastrophic” consequences if Congress fails to soon raise or suspend the statutory debt limit, saying inaction could lead to a self-inflicted economic recession and a financial crisis.

At a Senate Banking Committee hearing where she testified alongside Federal Reserve Chirman Jerome Powell, Yellen laid out in explicit terms what she expects to happen if Congress doesn’t deal with the debt limit before Oct. 18, which is when the Treasury Department calculates that the United States actually will face default.

Seniors could see their Social Security payments delayed, soldiers wouldn’t know when their paychecks were coming, and interest rates on credit cards, car loans and mortgages would rise, making payments more costly, she warned. She also 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,” Yellen said.

Yellen and Powell, America’s two top economic policymakers, also warned lawmakers Tuesday that the delta variant of the coronavirus had slowed the economic recovery, but they said the economy was continuing to strengthen.

Their testimony comes at a critical moment in the economic recovery. Businesses are facing labor shortages and consumers are coping with rising prices amid a resurgent pandemic. Congress also is grappling with a thicket of legislative challenges in the coming days, all of which could have an impact on the economy.

Those challenges include the need to extend federal funding to avoid a U.S. government shutdown; raising the debt limit to prevent defaulting on the nation’s financial obligations; and passing President Joe Biden’s infrastructure and social safety net packages.

In a letter to Congress ahead of the hearing and in her opening remarks, Yellen said that Treasury is likely to exhaust the “extraordinary measures” she has been employing to delay a default if Congress hasn’t acted by Oct. 18.

“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, 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 that Democrats must deal with the debt limit on their own.

“It is imperative that Congress swiftly addresses the debt limit,” 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 traditionally is 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 debt 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 Sen. John Kennedy, R-La., 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,” Yellen said, noting that deficits have been run under Democratic and Republican administrations. “It’s a shared responsibility.”

Kennedy said 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,” Kennedy told Yellen.