In the days following the November midterm elections, Treasury Secretary Janet L. Yellen felt optimistic that Democrats had performed better than expected and retained control of the Senate.
But on his way to a Group of 20 leaders meeting in Indonesia that month, he said Republicans taking control of the House pose a new threat to the US economy.
« I worry about the debt ceiling all the time, » 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 the remaining time in control of Washington to eliminate debt limit beyond the 2024 election. « Any way Congress can find to do it, I’m all for it. »
Democrats didn’t heed Ms. Yellen’s advice. Instead, the US has spent most of this year on the verge of default as Republicans have refused to raise or suspend the nation’s $31.4 trillion lending limit without limiting spending and canceling parts of the President Biden’s agenda.
Now the federal government’s cash balance is below $40 billion. And on Friday, Ms. Yellen told lawmakers that the X date — the point at which the Treasury Department runs out of enough money to pay all of its bills on time — will come by June 5.
Ms Yellen has kept her contingency plans close to her vest but signaled this week that she was thinking about how to prepare for the worst. Speaking at a WSJ CEO Council event, the Treasury secretary outlined the difficult 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 make interest and principal payments to bondholders before paying any other bills, but Ms. Yellen would only say it will face « very difficult choices. »
White House officials have declined to say whether any contingency plans are in place. Earlier this year, Biden administration officials said they weren’t planning on how to prioritize payments. As the US nears default, the Treasury Department declined to say whether that has changed.
Yet former Treasury and Federal Reserve officials said it was almost certain contingency plans had been devised.
Christopher Campbell, who was assistant secretary of the treasury for financial institutions from 2017 to 2018, said that given the rapidly approaching date X, « one would expect » that « there would be quiet conversations between the Treasury Department and the House Bianca on how it would handle a technical default and perhaps priority of payments.
The Treasury Department has developed a default playbook from previous debt limit deadlocks in 2011 and 2013. And Ms. Yellen has become familiar with those: During the last two significant deadlocks — in 2011 and 2013 — she was a senior official in the Federal Reserve contemplating how the central bank would try to contain the fallout from a default.
Ms. Yellen was briefed on the Treasury’s plans during those debates and engaged in its emergency discussions on how to stabilize the financial system in case the United States cannot pay all its bills on time.
According to Fed transcriptsIndeed, the Treasury Department plans to prioritize principal and interest payments to bondholders in the event that the X date is violated. Although Treasury Department officials had trepidation about the idea, they had expressed to Fed officials that it could eventually be done.
Fed officials also discussed steps they could take to stabilize money markets and prevent botched Treasury auctions from causing a default even if the Treasury Department was successfully paying off creditors. Ms. Yellen said in both 2011 and 2013 that she agreed with the plans to protect the financial system.
“I expect actions like this may prove unnecessary after the Treasury finally says it intends to pay principal and interest on time and we finally issue our set of policy statements,” Ms. Yellen said in 2011. “But if stress were to intensify, however, I would support interventions to relieve pressure on money market funds”.
Ms Yellen added that she was concerned about how vulnerable the market infrastructure was in the event of a default and said officials should think about how to plan for a default in the future.
« Given that we may face a similar situation somewhere down the road, I think it is important for us to think about the lessons learned so that we and the markets will be better prepared if we were to face such a situation again, » said Ms Yellen .
Eric Rosengren, who served as chairman of the Federal Reserve Bank of Boston in 2011, said in an interview that he expected Ms. Yellen, who is known for being rigorously prepared, to be as busy considering contingency plans as she was at the Fed more than a decade ago.
« It would be irrational not to do some planning, » Rosengren said, adding that Ms. Yellen’s background in dealing with financial stability issues makes her well positioned to be as prepared as possible for the consequences of a default. « The last thing you want is to be completely unprepared and have the worst result. »
As the debt ceiling standoff has intensified, Ms Yellen has not been involved in negotiations with lawmakers like some of her predecessors.
Mr. Biden has contacted Shalanda Young, his budget director, and Steven J. Ricchetti, a White House adviser, to lead negotiations with House Republicans. Ms. Yellen did not attend Oval Office meetings between Mr. Biden and Republicans.
« From the outside it doesn’t appear that Yellen is playing an active role in the budget negotiations, » said David Wessel, an economist at the Brookings Institution who worked with Ms. Yellen at Brookings. « It could be that it’s not her comparative advantage of hers. It could be that the White House wants to do it on its own. And it could be that they want to protect the credibility of the Treasury predicting the X date. »
Ms. Yellen took on a more behind-the-scenes role, briefing the White House on the nation’s cash reserves, calling business leaders and asking them to urge Republicans to raise the debt limit, and sending increasingly regular letters to 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 primary messenger on the debt limit on Sunday morning talk shows and that she is coordinating daily with Jeffrey D. Zients, the White House chief of staff. and Lael Brainard, the director of the National Economic Council, to map out the administration’s strategy. Other officials have attended the 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 Group of 7 finance ministers meeting so he can return to Washington to tackle the debt limit.
Despite Ms. Yellen’s efforts to avoid the politics surrounding the debt cap, Republicans have expressed doubts about her credibility.
Members of the House Freedom Caucus recently wrote a letter to President Kevin McCarthy urging Republican leaders to ask Ms. Yellen to « provide a comprehensive justification » for her earlier projection that the US could run out of cash as soon as June 1 . , accused her of « manipulative timing » and suggested that her predictions should not be trusted because she was wrong about how inflation would arrive.
The letter Ms. Yellen sent on Friday had 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 pay its debts beyond that date. .
Rep. Patrick T. McHenry, a North Carolina Republican who helps lead the negotiations, said Friday there were concerns about the X-date because it was being offered as an intermission. That, he said, is not what Americans feel when they don’t have the money to pay their mortgage bills the day they’re due.
« There was some skepticism about a date range — you can pick whatever you want, » she said. « That’s not how it works. »
Republicans have also targeted some of Ms. Yellen’s most cherished policy priorities in the negotiations, such as withdrawing part of the $80 billion the Internal Revenue Service received as part of last year’s Inflation Reduction Act.
The White House appears willing to return $10 billion of those funds, intended to bolster the agency’s ability to catch tax fraud, in exchange for keeping other programs.
In an interview on NBC’s Meet the Press this week, Ms. Yellen complained that Republicans were targeting the money.
« Something that worries me a lot is that they’ve even been in favor of removing funding that was provided to the Internal Revenue Service to crack down on tax fraud, » he said.
Each time the debt-limit stalemate eases, Democrats will most likely come under renewed pressure to revise the nation’s lending laws the next time they control the White House and Congress. Fearing that a fight over the debt limit would put her in the precarious position she now faces, Ms Yellen said in 2021 that she supported the abolition of the maximum lending limit.
« I believe that when Congress legislates spending and implements tax policy that determines taxes, these are the critical decisions that Congress is making, » Ms. Yellen said at a House Financial Services Committee hearing . “And if additional debt needs to be issued to finance those spending and tax decisions, I think it is very disruptive to put the president and me, as Treasury Secretary, in a situation where we may not be able to pay the bills that arise from those past decisions.