Treasury Secretary Janet L. Yellen on Tuesday warned lawmakers of the “catastrophic” consequences if Congress fails to quickly raise or suspend the legal debt limit, saying inaction could lead to an economic recession self-inflicted and financial crisis.
At a Senate Banking Committee hearing where she testified alongside Federal Reserve Chairman Jerome H. Powell, Yellen explained in explicit terms what she expects to happen if Congress does not not process the debt limit until Oct. 18, which the Treasury now believes is when the United States will face a default.
Seniors could see their social security payments delayed, soldiers would not know when their paychecks would arrive, and interest rates on credit cards, car loans and mortgages would rise, making payments more expensive , she warned. She also suggested that a default would jeopardize the dollar’s status as an international reserve currency, which Democrats say would be a giveaway for China.
âIt would be disastrous for the US economy, for global financial markets and for millions of families and workers whose financial security would be compromised by late payments,â Ms. Yellen said.
Ms Yellen and Mr Powell, the two top U.S. economic policymakers, also warned lawmakers on Tuesday that the Delta variant of the coronavirus had slowed the economic recovery, but they said the economy continued to strengthen.
Their testimony comes at a critical time in the economic recovery. Businesses face labor shortages and consumers face rising prices amid the resurgence of the pandemic. Congress is also grappling with a host of legislative challenges in the coming days, all of which could impact the economy.
These challenges include the need to expand federal funding to avoid a US government shutdown; raise the debt ceiling to avoid default on the nation’s financial obligations; and passing President Biden’s infrastructure and social safety net packages.
In a letter to Congress ahead of the hearing and in her opening remarks, Yellen said the Treasury would likely exhaust the “extraordinary measures” she used to delay a default if Congress did not act by October 18.
“At this point, we expect the treasury to end up with very limited resources that would run out quickly,” she wrote. “It is not certain that we can continue to meet all of the nation’s commitments after this date.”
For weeks, Ms. Yellen quietly pressured lawmakers to put politics aside and ensure the United States can continue to meet its tax obligations. She has been in contact with Wall Street CEOs and former Treasury Secretaries as she seeks to keep markets calm and find allies who can help her advocate for recalcitrant Republicans, who believe that Democrats must manage the debt limit on their own.
âIt is imperative that Congress quickly address the debt limit,â Ms. Yellen said. “The faith and credit of the United States would be compromised, and our country would likely face a financial crisis and economic recession.”
The debt limit has traditionally been approached on a bipartisan basis, but Republicans are refusing to join Democrats in passing legislation to lift the borrowing limit. Republicans argue Democrats have the voices to lift the debt limit on their own, and they should. Democrats claim Republicans are playing a dangerous political game.
In a tense exchange with Republican Senator John Kennedy of Louisiana, Ms Yellen said it was possible Democrats could lift the debt limit on their own, but Republicans were shirking their responsibility by refusing to cover. the debts they had helped incur.
âIt is very important to recognize that raising the debt ceiling is about paying the bills that Congress has incurred in the past,â Ms. Yellen said, noting that there have been deficits in the Democratic and Republican administrations. “It is a shared responsibility”.
Mr Kennedy, who was not convinced, said Democrats just wanted to tie Republicans to their big spending plans and a crisis could be avoided by Democrats.
âEasy peasy. Gone. Let’s go have a cocktail,â Mr. Kennedy told Ms. Yellen.
Ms Yellen also told lawmakers that the economy, while strengthening, is still in a “fragile” state.
“As our economy continues to grow and recover a substantial portion of the jobs lost in 2020, the significant challenges of the Delta variant continue to dampen the speed of the recovery and present substantial obstacles to a vibrant economy,” Ms Yellen said in her opening remarks. “Still, I remain optimistic about the medium-term trajectory of our economy, and I think we will return to full employment next year.”
Ms. Yellen and Mr. Powell will testify again Thursday before the House Financial Services Committee.