Treasury Secretary Janet Yellen said she would meet with senior Wall Street bankers next week to discuss the federal debt ceiling, which could be reached as early as June 1. She also called on them to voice their concerns about the potential economic fallout of a default.
The federal debt ceiling is a legal limit on how much the U.S. government can borrow to pay its bills. It was set at $31.4 trillion in 2021 and has already been reached. The Treasury Department is using accounting tricks to keep paying the government’s obligations, but these measures will run out soon.
If Congress fails to raise the debt ceiling before then, the U.S. will default on its debts for the first time in history. This could have catastrophic consequences for the global economy, as well as for millions of Americans who rely on federal programs and services.
Yellen told Bloomberg TV that she was concerned about the lack of progress in Congress to address the debt ceiling issue. She said she would meet with senior executives from major banks and financial institutions next week to discuss the situation and urge them to speak out publicly about the risks of a default.
“I think it’s appropriate for them to express their views about how this debate is affecting the economy and financial markets,” Yellen said.
She also said that there was still uncertainty about exactly when the Treasury would run out of cash, but she would keep Congress informed of any changes in the date.
“I don’t have a precise estimate at this point,” she said. “It could be early June. It could be later. But we are operating on fumes at this point.”
Yellen’s comments come as President Biden and congressional leaders are locked in a partisan standoff over the debt ceiling. Republicans have refused to cooperate with Democrats to raise the limit, arguing that it would enable more spending and increase the debt burden.
Democrats have accused Republicans of playing political games with the nation’s creditworthiness and endangering the economy. They have also pointed out that most of the current debt was incurred under previous administrations, including the Trump administration, which enacted a massive tax cut in 2017 that added nearly $2 trillion to the deficit.
Some Democrats have suggested that Biden could use his executive authority to raise the debt ceiling unilaterally, citing a provision in the 14th Amendment that states that “the validity of the public debt … shall not be questioned.” However, this option is legally controversial and has never been tested before.
Another option is to include a debt ceiling increase in a budget reconciliation bill, which only requires a simple majority in the Senate and cannot be filibustered by Republicans. However, this process could take weeks and may not be ready before the deadline.
The last time the U.S. came close to defaulting on its debts was in 2011, when a similar standoff between then-President Obama and congressional Republicans resulted in a downgrade of the U.S. credit rating and a sharp drop in stock markets. A repeat of that scenario could be even more damaging this time, as the U.S. and the world are still recovering from the COVID-19 pandemic and its economic fallout.
Yellen said she hoped that Congress would act responsibly and raise the debt ceiling as soon as possible.
“I think it would be disastrous for the American economy and for global financial markets,” she said. “And I just plead with Congress to protect the full faith and credit of the United States by acting quickly.”