US Will Hit Debt Limit on Thursday, Yellen Tells Congress

January 13, 2023 by Dan McCue
US Will Hit Debt Limit on Thursday, Yellen Tells Congress
The Treasury Department. (Photo by Dan McCue)

WASHINGTON — Treasury Secretary Janet Yellen warned Congress on Friday that she will have to begin employing “extraordinary measures” next Thursday, Jan. 19, to continue to pay the nation’s bills.

The notice from Yellen, spelled out in a letter to newly elected House Speaker Kevin McCarthy, R-Calif., is effectively the starting of the nation’s fiscal stopwatch. 

If lawmakers do not act to raise the statutory debt limit, Yellen said, her ability to delay a default on the nation’s debts could be exhausted by early June.

Shai Akabas, director of economic policy at the Bipartisan Policy Center, told reporters on a conference call Friday that Yellen’s letter was a “standard” communication that Treasury secretaries historically send out in advance of the nation reaching its debt limit.

“This is not a time for panic,” Akabas said. “We are many months away from the U.S. being unable to meet all of its obligations. 

“But it is certainly a time for policymakers to begin negotiations in earnest,” he continued. “We’ve seen times in the past when they’ve wound up at the 11th hour with their backs against the wall and no resolution in sight, and there’s plenty of time to avoid that outcome.” 

The debt limit, which is set by Congress, restricts the total amount of money that the federal government can legally borrow. 

When the debt limit is reached, the Treasury Department can no longer borrow money to cover government operations. 

As Yellen mentioned in her letter, once the limit is reached, the department can temporarily draw on “extraordinary measures” — accounting maneuvers that can allow the government to continue standard operations for a limited period.

The two extraordinary measures the Treasury Department anticipates taking next week are suspending new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund, and suspending reinvestments in the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan. 

“Congress has expressly provided Treasury with authority to take these actions, and prior Treasury secretaries have used these measures, which will reduce the amount of outstanding debt subject to the limit and temporarily provide additional capacity for Treasury to continue financing the operations of the federal government,” Yellen wrote.

She added that after what she referred to as “the debt limit impasse” has ended, all of the funds will be made whole.

The unknown, right now at least, is how long these extraordinary measures will have to be taken.

Yellen said this is due to a variety of factors, including the challenges of forecasting the payments and receipts of the U.S. government months into the future. 

“While Treasury is not currently able to provide an estimate of how long extraordinary measures will enable us to continue to pay the government’s obligations, it is unlikely that cash and extraordinary measures will be exhausted before early June,” Yellen wrote. 

“Consistent with past practice, I will, of course, continue to keep Congress informed as we approach the exhaustion of our resources,” she added. 

President Joe Biden signed legislation in December 2021 that raised the debt limit by $2.5 trillion to approximately $31.4 trillion, resolving the most recent debt limit standoff.

A number of the House Republicans who now control Congress have suggested they intend to use debt ceiling negotiations  as a means to cut discretionary spending and, potentially, even some entitlements.

Should lawmakers fail to act in time to resolve the next one and the Treasury’s cash reserves run out, the federal government would be unable to meet all of its obligations in full and on time.

According to the Bipartisan Policy Center, which monitors the debt limit among other issues, this unprecedented event would likely have catastrophic consequences for financial markets and Americans throughout the country.

Yellen was equally concerned, telling McCarthy, “failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability.”

The center has previously projected that the federal government would likely not reach what it calls the “X date” until at least the third quarter of 2023.

“Most policymakers agree that we have a major fiscal challenge as a country. Our debt is unsustainable on its current trajectory. We should be having bipartisan negotiations about what to do about that challenge,” Akabas said. 

“As part of that, we should also ensure that we are meeting all of our obligations,” he continued. 

“That doesn’t mean that a negotiation should be contingent upon the debt limit,” Akabas  added. “But there’s no reason why we couldn’t agree on measures to improve our fiscal outcome, and also ensure that we are paying all of our bills in full and on time.”

He said the center will be releasing an updated X date projection in the coming weeks that will take into account “the many unanticipated policy and economic developments” that have occurred since its previous projection was released last June.

Dan can be reached at [email protected] and @DanMcCue

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