Treasury Secretary Janet Yellen warned that her department will effectively run out of cash around Oct. 18 unless legislative action is taken to suspend or increase the federal debt limit, putting pressure on lawmakers to avert a default on U.S. obligations.
“Treasury is likely to exhaust its extraordinary measures if Congress has not acted to raise or suspend the debt limit by October 18,” Yellen said in a letter Tuesday to congressional leaders. Yellen said separately at a Senate hearing on Tuesday that “catastrophic” results would follow a failure to address the debt limit, including a “financial crisis” and recession.
Yellen’s latest timeline is somewhat sooner than many on Wall Street anticipated, and her warning intensified signs of financial market concern amid an impasse between Republicans and Democrats on addressing the debt ceiling. Yields on Treasury bills maturing around Oct. 18 rose more than those on other securities. A broader selloff in Treasuries contributed to a slide in equities.
House Speaker Nancy Pelosi said that her chamber could vote as soon as Tuesday on a new debt-ceiling measure, after Republicans blocked one such effort on Monday. Senate GOP leader Mitch McConnell reiterated Tuesday, however, that “I’ve made it perfectly clear” Republicans wouldn’t back a debt-limit increase given the pending tax and social spending package that Democrats are pursuing on their own.
Further political posturing is likely in coming days, as Republicans attempt to force Democrats to boost the debt limit on their own and Democrats seek to pressure the at-least-10 GOP senators needed to defeat a filibuster into a bipartisan vote. Historically, votes address the debt limit have been bipartisan.
Democratic Representative Jimmy Gomez said a vote to increase the limit could proceed Tuesday or Wednesday. While that would likely be again opposed by Republicans, it would represent an evolution in thinking on the part of Democrats — Monday’s measure was a suspension of the limit. Democrats could proceed on their own with a debt-limit increase, but the timeline to start that in time to finish by Oct. 18 is compressed.
“The closer to the deadline the process starts, the more likely it is that Republicans would agree to waive some of the required time for debate,” Alec Phillips, an analyst at Goldman Sachs Group Inc., wrote in a note Tuesday. “If so, Democratic leaders seem incentivized to let the clock run down before acting.”
Pelosi told reporters Tuesday, “We have to pass the debt limit.” She underscored, “It’s about paying past bills,” highlighting the point that the need to boost the debt ceiling reflects past fiscal policy decisions enacted by members of both parties.
Speaking on the Senate floor Tuesday morning, Majority Leader Chuck Schumer gave no indication of a clear path forward on raising the debt ceiling. He said he will seek approval of all senators later Tuesday to lower the threshold from 60 votes to a simple majority to suspend the debt limit — consent that is sure to get GOP opposition. At the same time, he continued to insist Democrats won’t allow a default or a closure of the government.
Republican lawmakers have used the debt-limit debate to help them portray Biden’s proposed fiscal expansion — spanning expanded child tax credits, paid family leave and new benefits for Medicare recipients — as out-of-control government spending. An eventual Democrat-only vote to raise the debt limit would provide fodder for election attack ads.
Democrats as of late Monday hadn’t given up on the idea of forcing Republicans to join them to address the issue. Democratic Senator Chris Van Hollen of Maryland dismissed the idea of going through the convoluted process known as reconciliation that would be needed for Democrats to act on their own, and predicted Republicans would eventually go along with a debt-ceiling increase.
“They’ll have that on their hands,” Van Hollen said of a debt crisis. “It’s going to be pretty obvious to the American public after we vote on this a couple of times between now and then that they’re tanking the economy.”
Democrats on Tuesday discussed ways to change the debt ceiling in the future, Pelosi said. Those included minting a $1 trillion dollar coin or giving the Treasury the power to raise the ceiling on its own.
Blake Gwinn, head of U.S. rates strategy for RBC Capital Markets, said he doesn’t expect any broad market impact from the debt-limit fight beyond Treasury debt maturing in that narrow window, unless the country gets “within a few days” of default or a major credit rating company downgrades the U.S. debt rating, as occurred in 2011.
“Because we’ve been through this before, I think people will still expect a deal to come together until the very last minute,” Gwinn said.
During the debt limit battles of 2011 and 2013 investors grew worried as default neared. In 2011, yields on effected Treasury bills began to surge about eight days ahead of default and in 2013 about 20 days beforehand. Stocks tumbled in the aftermath of the 2011 sovereign downgrade by S&P Global Ratings.
The debt standoffs also have direct costs to taxpayers because of the higher interest rates investors demand because of the payment uncertainty.
Delays in raising the debt limit in 2011 forced the government to pay $1.3 billion in additional borrowing costs that year, not including any impact on the Treasury’s costs in later years, according to a U.S. General Accountability Office assessment the following year.
Democrats can raise the debt ceiling on their own through the reconciliation process, which bypasses the filibuster in the Senate. The most likely scenario would have Democrats revise an already-passed budget resolution that set the stage for an economic package of as much as $3.5 trillion, creating separate legislation to raise the debt ceiling.
The process would involve two lengthy Senate debates and “vote-a-ramas,” where scores of amendments could be offered. Once the Senate is finished, the House would have to clear the amended budget resolution and the debt-cap hike. Other Democratic lawmakers have stopped short of ruling out the go-it-alone strategy.
Yellen’s new estimated timeline — an update from the “some time” in October she had previously advised — suggests Democrats will need to get started on the reconciliation process within days if they opt to pursue that solution.
“While this is our best estimate, the federal government’s cash flows are subject to unavoidable variability,” Yellen said in her letter to Pelosi, Schumer, McConnell, House minority leader Kevin McCarthy and other top lawmakers. “This uncertainty underscores the critical importance of not waiting to raise or suspend the debt limit.”
