Yellen’s debt limit warnings went unheeded, leaving her to face the fallout

In the days following November’s midterm elections, Treasury Secretary Janet L. Yellen was optimistic that Democrats had performed better than expected and had retained control of the Senate.

But as she traveled to the Group of 20 leaders summit in Indonesia that month, she said Republicans taking control of the House posed a new threat to the US economy.

“I still worry about the debt ceiling,” Ms Yellen told The New York Times in an interview on her flight from New Delhi to Bali, Indonesia, in which she urged Democrats to use their remaining time in control of Washington to raise the debt. limit beyond the 2024 election. “Any way Congress can find to do it, I’m all for it.”

Democrats ignored Ms Yellen’s advice. Instead, the United States has spent most of this year on the brink of default as Republicans refused to raise or suspend the $31.4 trillion national borrowing limit without capping. spending and cancel parts of President Biden’s program.

Today, the federal government’s cash balance has fallen below the $40 billion mark. And on Friday, Ms Yellen told lawmakers that the X date — when the Treasury Department runs out of enough money to pay all of its bills on time — will come on June 5.

Ms Yellen kept her contingency plans close to the waistcoat but reported this week that she had thought about how to prepare for the worst. Speaking at a WSJ CEO Council event, the Treasury Secretary laid out the tough decisions she would face if the Treasury were forced to choose which bills to prioritize.

Most market watchers expect the Treasury Department to choose to pay interest and principal to bondholders before paying other bills, but Ms Yellen would only say she would face very difficult choices.

White House officials declined to say whether any contingency planning was underway. Earlier this year, Biden administration officials said they were not planning how to prioritize payments. As the United States moves closer to default, the Treasury Department declined to say if that has changed.

Still, former Treasury and Federal Reserve officials said it was almost certain contingency plans were being drawn up.

Christopher Campbell, who served as Assistant Secretary to the Treasury for Financial Institutions from 2017 to 2018, said that given the rapidly approaching X date, “one would expect” that “there are low-key conversations between the Treasury Department and the White House on how they would handle a technical default and possibly a tiering of payments.

The Treasury Department has crafted a default playbook from previous debt limit standoffs in 2011 and 2013. and 2013 – she was a senior Federal Reserve official contemplating how the central bank would try to contain the fallout from a default.

Ms Yellen was briefed on the Treasury’s plans during these debates and engaged in her own emergency discussions on how to stabilize the financial system in case the United States could not pay all its bills on time.

According to the Fed transcripts, the Treasury Department actually planned to prioritize principal and interest payments to bondholders if the X date was missed. Although Treasury Department officials had apprehensions at the idea, they had expressed to Fed officials that it could finally be done.

Fed officials also discussed steps they could take to stabilize money markets and prevent failed Treasury auctions from triggering a default even if the Treasury Department were successful in paying creditors. Ms Yellen said in 2011 and 2013 that she agreed with plans to protect the financial system.

“I expect actions like this may prove unnecessary after the Treasury finally said it intended to pay principal and interest on time and we finally released our own set. of policy statements,” Ms Yellen said in 2011. “But if the stress escalates nonetheless, I would support interventions aimed at easing pressures on money market funds.

Ms Yellen added that she was concerned about the vulnerability of market infrastructure in the event of a default and said officials should think about ways to plan for a default in the future.

“Given that we could face a similar situation somewhere down the road, I think it is important for us to reflect on the lessons learned so that we and the markets are better prepared if we are faced with such a situation again. situation,” Ms Yellen said.

Eric Rosengren, who was the president of the Federal Reserve Bank of Boston in 2011, said in an interview that he expected Ms Yellen, who is known to be rigorously prepared, to be busy considering plans for emergency as it did at the Fed more than a decade ago.

“It would be irrational not to do any planning,” Mr. Rosengren said, adding that Ms. Yellen’s experience with financial stability puts her in a good position to be as ready as possible in the event of a default. “The last thing you want is to not be fully prepared and have the worst result.”

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

Mr. Biden has tapped Shalanda Young, his budget director, and Steven J. Ricchetti, White House adviser, to lead the negotiations with House Republicans. Ms. Yellen did not attend Oval Office meetings between Mr. Biden and Republicans.

“From the outside, it doesn’t look like Yellen is taking an active role in budget negotiations,” said David Wessel, a senior economics fellow at the Brookings Institution who worked with Ms. Yellen at Brookings. “It may be that it’s not its comparative advantage, it may be that the White House wants to do it itself, and it may be that it wants to protect the credibility of the Treasury by predicting the X date. “

Ms. Yellen has played a more behind-the-scenes role, briefing the White House on the country’s cash reserves, calling business leaders and asking them to urge Republicans to lift the debt ceiling and sending letters increasingly more regulars in Congress warning when the federal government will be unable to pay all of its bills.

A White House official pointed out that Ms. Yellen has been the Biden administration’s main messenger on the debt ceiling on Sunday morning talk shows, and that she coordinates daily with Chief Jeffrey D. Zients. of the White House cabinet, and Lael Brainard, the director of the National Economic Council, to map out the administration’s strategy. Other officials have participated in Oval Office meetings because the White House continues to view them as budget negotiations, the official added.

The Treasury Secretary also cut short a recent trip to Japan for a meeting of Group of 7 finance ministers so she could return to Washington to deal with the debt limit.

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

Members of the House Freedom Caucus recently wrote a letter to Chairman Kevin McCarthy urging Republican leaders to demand that Ms Yellen “provide full justification” for her earlier projection that the United States could run out of money as early as June 1. In the letter, they accused her of “manipulative timing” and suggested that her forecast should not be trusted because she was wrong about soaring inflation.

The letter Ms Yellen sent on Friday provided a specific deadline – June 5 – and listed upcoming payments the federal government is required to make and explained why the Treasury Department would not be able to cover its debts to the beyond this date.

Rep. Patrick T. McHenry, a Republican from North Carolina helping lead the negotiations, said Friday there were doubts about the X date because it was offered as a range. That, he said, is not what Americans experience when they don’t have the money to pay their mortgage bills when they’re due.

“There was some skepticism about a date range — that you can choose whatever you want,” he said. “That’s not how it works.”

Republicans have also targeted some of Ms. Yellen’s most prized policy priorities in the negotiations, such as cutting some of the $80 billion the Internal Revenue Service received under the Tax Cuts Act. inflation last year.

The White House appears ready to return $10 billion of those funds, which are 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 going for the money.

“What worries me a lot is that they were even in favor of cutting the funds that were provided to the Internal Revenue Service to fight tax evasion,” she said.

Each time the impasse over the debt limit eases, Democrats will most likely come under renewed pressure to revise the laws that govern the nation’s borrowing the next time they control the White House and Congress. Fearing that a fight over the debt ceiling could put her in the precarious position she now faces, Ms Yellen said in 2021 that she was in favor of abolishing the borrowing ceiling.

“I believe that when Congress legislates spending and sets tax policy that determines taxes, those are the critical decisions that Congress makes,” Ms. Yellen told a House Financial Services Committee hearing. “And if in order to fund those spending and those tax decisions it’s necessary to issue additional debt, I think it’s very destructive to put the president and myself, as secretary of the treasury, in a situation where we may be unable to pay the bills that result from these past decisions.