Yellen Inflation

Department of the Treasury Secretary Janet Yellen listens to lawmakers in June as she testifies during a Senate Finance Committee on Capitol Hill in Washington.

Treasury Secretary Janet Yellen said the department will begin taking special accounting maneuvers on Jan. 19 to avoid breaching the U.S. debt limit, urging lawmakers to boost the ceiling to avert a devastating payments default.

“The period of time that extraordinary measures may last is subject to considerable uncertainty due to a variety of factors, including the challenges of forecasting the payments and receipts of the U.S. government months into the future,” Yellen wrote in a letter to bipartisan congressional leaders. “It is unlikely that cash and extraordinary measures will be exhausted before early June.”

The letter kicks off what’s likely to be a prolonged, intense political battle over U.S. fiscal policy that observers warn could put a major strain on financial markets and elevate dangers for an economy already facing the risk of recession. Economists expect the Treasury will run out of cash around August if the debt ceiling isn’t boosted.

Republicans in the House, which their party now controls, warn they’ll insist on spending cuts in return for agreeing to boost the debt limit. But Democrats, who control the Senate, and President Joe Biden reject such “hostage-taking” maneuvers and want a straightforward increase, such as Congress offered former GOP President Donald Trump.

The current debt limit, or the total debt the Treasury can issue to the public and other government agencies, is just under $31.4 trillion. It was set in December 2021, when Congress raised it by $2.5 trillion.

Currently, the government is roughly $78 billion away from reaching the limit.

Should the Treasury become unable to issue fresh debt and then run out of cash, the U.S. government would default on its financial obligations. Wall Street analysts say the risk of default doesn’t really loom until the second half of 2023, after the extraordinary measures the Treasury uses to avoid exceeding the cap are exhausted.

Yellen, during the 2021 fights over the debt limit, warned that federal contractors and employees would go unpaid and Social Security checks would stop, among other things. Unless their payments were prioritized, investors in Treasury securities wouldn’t receive interest payments or get back their principal on maturing bills, notes and bonds.

Some economists and bond strategists are warning of the kind of turmoil seen in 2011, when a debt ceiling standoff saw S&P Global Ratings downgrade the sovereign U.S. rating from AAA. Equities tumbled around the world, and U.S. consumer confidence was hit, undermining the post-financial-crisis economic recovery.

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