Yellen’s Debt Limit Warnings Went Unheeded, Leaving Her to Face Fallout

In the days following the November midterm elections, Treasury Secretary Janet L. Yellen was feeling upbeat about the fact that Democrats had done better than expected and Maintain control of the Senate.

But when she visited Indonesia this month for a summit of Group of 20 leaders, she said Republicans taking control of the House posed a new threat to the U.S. economy.

“I’m always concerned about the debt ceiling,” Ms Yellen said told the New York Times In an interview on his flight from New Delhi to Bali, Indonesia, he urged Democrats to use their remaining time in control of Washington to raise the debt ceiling beyond the 2024 election. “Any way Congress can find to accomplish that, I’m all for it.”

Democrats did not heed Ms. Yellen’s advice. Instead, the United States has spent much of this year teetering on the brink of default as Republicans continue to raise the nation’s $31.4 trillion borrowing limit without stepping back and limiting spending on President Biden’s agenda. Refused to extend or suspend.

Now the federal government’s cash balance has fallen below $40 billion. And on Fridays, Ms. Yellen told lawmakers That X-date — the point at which the Treasury runs out of enough money to pay all its bills on time — will be reached by June 5.

Ms. Yellen has kept her contingency plans close to the vest but signaled this week that she is thinking about how to prepare for the worst. Speaking at a WSJCEO Council event, the Treasury Secretary outlined the difficult decisions he would face if the Treasury was forced to make a choice. Bills to prefer.

Most market watchers expect the Treasury Department to choose between interest and principal payments to bondholders before paying other bills, yet Ms. Yellen would only say she faces a “very tough choice.” will have.

White House officials have declined to say whether any contingency plans are in place. Earlier this year, Biden administration officials said they were not planning on prioritizing the payments. As the U.S. nears default, the Treasury Department declined to say whether that has changed.

Even so, former Treasury and Federal Reserve officials said it was almost certain that contingency plans were in place.

Christopher Campbell, who served as Assistant Treasury Secretary for Financial Institutions from 2017 to 2018, said that given the X-date fast approaching, “one would expect” that “the Treasury Department and the White House There will be quiet discussions between the two on how they will manage a technical default and perhaps the priority of payments.

The Treasury Department has developed a default playbook from previous debt ceiling standoffs in 2011 and 2013. And Ms. Yellen has become quite familiar with them: During the last two significant delays — in 2011 and 2013 — she was a top Federal Reserve official who was mulling it. The central bank will try to contain the loss from the default.

Ms. Yellen was briefed on the Treasury’s plans during those discussions and engaged in her own emergency talks on how to stabilize the financial system in the event that the United States cannot pay all of its bills on time.

According to the Fed transcripts, the Treasury actually planned to prioritize principal and interest payments to bondholders in the event of an X-date breach. Although Treasury officials were nervous about the idea, they expressed to Fed officials that it could eventually be done.

Fed officials also discussed steps they could take to stabilize money markets and prevent failed Treasury auctions from defaulting even if the Treasury Department is successfully paying creditors. Ms. Yellen said in both 2011 and 2013 that she was on board with plans to protect the financial system.

Ms. Yellen said in 2011 that “I expect that these types of measures may prove unnecessary after the Treasury has finally indicated that they intend to pay the principal and interest on time and we have finally has issued a set of its policy statements.” If tensions nevertheless rise, I would support interventions to ease the pressure on money market funds.”

Ms. Yellen added that she was concerned about how vulnerable market infrastructure would be in the event of a default and that officials should think about ways to plan for future defaults.

“Given that we may face a similar situation somewhere down the road, I think it’s important for us to think about the lessons learned so that if we face a similar situation again, we and the markets Better get ready,” Ms. Yellen said.

Eric Rosengren, who was president of the Federal Reserve Bank of Boston in 2011, said in an interview that he expected Ms. Yellen, who is known to be tough-minded, to be as busy considering contingency plans as she was. did in the feed. A decade ago

“It would be unreasonable not to have some planning,” Mr. Rosengren said, adding that Ms. Yellen’s background in dealing with financial stability issues made her as prepared as possible for the outcome of a default. does. “The last thing you want is to be completely unprepared and have the worst outcome.”

As the debt ceiling impasse has intensified, Ms. Yellen has not been as involved in negotiations with lawmakers as some of her predecessors.

Mr. Biden tapped. Shalinda Young, his budget director, and Steven J. Ritchie, White House adviser, to lead negotiations with House Republicans. Ms. Yellen has not attended Oval Office meetings between Mr. Biden and Republicans.

“It doesn’t look from the outside like Yellen is taking an active role in the budget negotiations,” said David Wessel, a senior economic fellow at the Brookings Institution. “It may not be his comparative advantage, it may be that the White House wants to do it themselves, and it may be that they want to protect the credibility of the Treasury predicting the X-date. “

Ms. Yellen has played a behind-the-scenes role, briefing the White House on the nation’s cash reserves, calling business leaders and asking them to push Republicans to end the debt ceiling and Quickly send formal letters to Congress warning when the federal government will withdraw. Unable to pay all your bills.

A White House official pointed out that Ms. Yellen has been the primary messenger for the Biden administration on the debt ceiling on Sunday morning talk shows, and that she is in daily contact with White House Chief of Staff Jeffrey DeZiantes. have been and Lyle Brainard, director of the National Economic Council, to develop the administration’s strategy. Other officials have attended Oval Office meetings because the White House views them as budget negotiations, the official added.

The Treasury secretary also cut short a recent trip to Japan for a Group of 7 finance ministers meeting so he could return to Washington to address the debt ceiling.

Despite Ms. Yellen’s efforts to steer clear of the politics surrounding the debt ceiling, Republicans have expressed doubts about her credibility.

Members of the House Freedom Caucus recently wrote a letter to Speaker Kevin McCarthy urging Republican leaders to demand that Ms. Yellen “fully justify” her earlier prediction that June 1 With the US running out of cash. In the letter, they accused him of “manipulating timing” and suggested that his forecasts should not be trusted because they were wrong about how high inflation would rise.

Ms. Yellen’s letter on Friday provided a specific deadline — June 5 — and listed the upcoming payments the federal government needs to make, and said the Treasury Department would continue to use its funds beyond that date. Why would one fail to meet the debts?

Representative Patrick T. McHenry, a North Carolina Republican who is helping lead the negotiations, said Friday that skepticism about the X-date has arisen because it has been presented as a threshold. That said, this is not what Americans experience when they don’t have the money to pay their mortgage bills on the day they come due.

“There was some skepticism about the date range — that you can pick whatever you want,” he said. “It doesn’t work that way.”

Republicans are also targeting some of Ms. Yellen’s most valuable policy priorities in the talks, such as returning some of the $80 billion the Internal Revenue Service received under last year’s Inflation Reduction Act. to take

The White House appears willing to return $10 billion of those funds, intended to bolster the agency’s ability to catch tax evaders, in exchange for preserving other programs.

In an interview on NBC’s Meet the Press this week, Ms. Yellen lamented that Republicans were targeting the money.

“One of the things I’m very concerned about is that they’ve also been in favor of eliminating funding to the Internal Revenue Service to crack down on tax fraud,” he said.

Whenever the debt ceiling deadlock eases, Democrats will most likely come under renewed pressure to change the rules that govern the nation’s borrowing the next time the White House and Congress are in control. . Fearing that a fight over the debt ceiling would put her in the uncertainty she now faces, Ms. Yellen said in 2021 that she supported ending the borrowing limit.

“I believe that when Congress legislates spending and enacts tax policy that determines taxes, those are important decisions that Congress is making,” he said. Ms. Yellen said at a House Financial Services Committee hearing. “And if it’s necessary to issue additional debt to finance these spending and tax decisions, I think it’s very disastrous to put the president, and myself as Treasury secretary, in a situation where we can’t pay those bills. may be unable to “result in those past decisions.”