Yellen to Congress: Raise the debt ceiling or risk 'irreparable harm'

Treasury Secretary Janet YellenJanet Louise YellenMcConnell, Shelby offer government funding bill without debt ceiling House passes bill to prevent shutdown and suspend debt limit Hillicon Valley — Presented by Xerox — FBI director pressed on agency reportedly withholding Kaseya decryption key MORE urged congressional leaders Friday to raise the federal debt limit as soon as possible or risk “irreparable harm to the U.S. economy and the livelihoods of all Americans.”

In a Friday letter, Yellen warned that the Treasury Department is unable to project how long it could stave off a potentially catastrophic default on the national debt if Congress does not either raise or suspend the debt ceiling before Aug. 1. 

“In recent years Congress has addressed the debt limit through regular order, with broad bipartisan support,” Yellen wrote. “I respectfully urge Congress to protect the full faith and credit of the United States by acting as soon as possible.”

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The debt ceiling does not increase or reduce government spending, but sets a cap on how much debt the government can take on while paying for obligations already approved by Congress and the president. A two-year deal to suspend the debt limit expires on July 31, and Congress is unlikely to reach another agreement to lift it before then.

Senate Republican leaders said this week there will not be enough Republicans to support a debt ceiling increase or suspension if it is not tied to debt reduction measures. Democrats have refused those requests, arguing that the GOP is holding the economy hostage to partisan demands.

The Treasury Department has taken extraordinary measures to avert defaults during prior debt ceiling showdowns. But Yellen warned Friday that the department is unable to predict when those efforts would run out because of difficulties created by the coronavirus pandemic.

While the Congressional Budget Office (CBO) estimated this week that the Treasury likely has until October or November before hitting the end of the road, Yellen said it could happen soon after Congress returns from recess in the middle of September.

Yellen also warned lawmakers that the threat of a default alone could damage the nation’s financial standing. She cited the decision among rating agencies to downgrade the U.S’s credit worthiness for the first and so far only time during the 2011 debt ceiling standoff.

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“This is why no President or Treasury Secretary of either party has ever countenanced even the suggestion of a default on any obligation of the United States,” Yellen wrote.

Yellen sent the letter to Speaker Nancy PelosiNancy PelosiDemocrats seek to cool simmering tensions Louisiana delegation split over debt hike bill with disaster aid House Democrats unveil legislation to curtail presidential power MORE (D-Calif.) and House Minority Leader Kevin McCarthyKevin McCarthyWoodward: Milley was 'setting in motion sensible precautions' with calls to China Thompson says he hopes Jan 6. committee can complete work by 'early spring' Juan Williams: Shame on the anti-mandate Republicans MORE (R-Calif.); Senate Majority Leader Charles SchumerChuck SchumerLouisiana delegation split over debt hike bill with disaster aid The Hill's Morning Report - Presented by Alibaba - Government shutdown fears increase as leaders dig in McConnell signals Senate GOP will oppose combined debt ceiling-funding bill MORE (D-N.Y.) and Minority Leader Mitch McConnellAddison (Mitch) Mitchell McConnellMcConnell, Shelby offer government funding bill without debt ceiling Franken targets senators from both parties in new comedy tour Woodward: Milley was 'setting in motion sensible precautions' with calls to China MORE (R-Ky.); and the top Democrats and Republicans on the Senate Finance and House Ways and Means committees.

The historic strength and stability of the U.S. has established the U.S dollar as the world’s reserve currency and U.S. Treasury bonds as one of the safest-considered assets available in global markets. A default on the national debt could upend trillions of dollars in global commerce and financial holdings underpinned by the full faith and credit of the U.S., triggering a financial crisis.

Federal Reserve Chair Jerome Powell also warned during the 2019 debt ceiling showdown that the central bank — the U.S.'s lender of last resort — may not be able to contain the damage of a national default.