Yellen touts payoff from Biden's stimulus plan
Treasury Secretary Janet Yellen said the department’s fiscal tools to keep the national debt from breaching its congressionally mandated limit may be exhausted as soon as this summer, which would be earlier than some analysts are expecting.
“There are scenarios in which, you know, sometime during the summer the extraordinary measures would run out,” Yellen said Friday during a press briefing at the White House.
The current suspension of the U.S. borrowing limit expires July 31, and the Treasury Department on Wednesday cautioned that if Congress fails to act, the administration would have to shift federal funding to make good on debt payments.
Yellen’s comment is more specific than Treasury’s warning on Wednesday that the agency was “evaluating a range of potential scenarios, including some in which extraordinary measures could be exhausted much more quickly than in prior debt limit episodes.” It’s also earlier than the October target that some analysts had penciled in.
The latest comments could put additional pressure on lawmakers to raise or suspend the ceiling before it returns following a two-year suspension. While the Treasury has options to keep paying interest on debt for a time -- such as redirecting money from federal retirement funds -- legislative action will be vital.
With about US$300 billion of so-called extraordinary measures available, strategists from Bank of America, Wrightson ICAP and Barclays estimate the government can remain funded into the fourth quarter. The Bipartisan Policy Center also expects the drop-dead date to arrive in the fall.
The risk that Treasury will exhaust its toolkit sooner rather than later “is pretty far out in the tail, but it’s not inconceivable,” said Lou Crandall, chief economist at Wrightson ICAP. “If the ramp-up of Treasury spending is slower than expected, some of the cash that we expect to go out from late May through July might get pushed back into August, which would chew up the Treasury’s resources very quickly.”
“It is far more likely that the Treasury will have enough cash to operate well into the fourth quarter,” Crandall said.
The ceiling was suspended under a 2019 agreement between the Trump administration and Congress. It’s been a political football in the past because voting for an increase can invite political attacks over ramping up the debt burden for future generations.
Yellen will need Congress to refrain from political brinkmanship and avoid any disruption -- at worst a default or government shutdown -- that would undermine the recovery from the pandemic.
Navigating the debt limit debate is also a test of unity within the Democratic Party. With slim majorities in both chambers of Congress, Democrats are widely expected to raise the debt ceiling using a fast-track budget tool enabling them to bypass a Senate Republican filibuster. That would deprive the GOP of being able to use the debt ceiling as leverage in exchange for spending cuts.
Yet pushing through a debt-limit increase using that tactic could mean wrapping it together with a raft of spending and tax measures that follow through on Biden’s longer-term economic proposals.
That in turn means Democrats would have to unify behind a grand compromise in the weeks after the Aug. 1 end of the debt limit suspension, before Treasury measures run out.