Yellen Sounds Alarm on Default in New Warning to McCarthy on Debt Ceiling Deadlock

Treasury Secretary Janet Yellen listens during an open session of a Financial Stability Oversight Council meeting at the Department of the Treasury in Washington on April 21, 2023. Alex Wong/Getty Images

Treasury Secretary Janet Yellen has issued a renewed—and alarmist—warning to House Speaker Kevin McCarthy (R-Calif.) and other congressional leaders, reiterating her earlier position that the country could run out of money to pay its debt obligations as early as June 1, but this time around expressing more confidence in her dire prediction.

Yellen has repeatedly warned that the debt ceiling deadlock grinding on in Washington is pushing the country closer to the so-called X-date, when the Treasury Department’s bag of accounting tricks (known as “extraordinary measures”) runs out and the government faces the prospect of a debt default.

In her first letter to McCarthy on May 1 (pdf), Yellen said it was the Treasury Department’s “best estimate” that it would be unable to continue to satisfy all of the government’s debt obligations by early June and potentially as early as June 1. She reiterated that view in a May 15 letter, in which she noted it’s impossible to predict the exact timing of the X-date.

But in a new letter (pdf) to McCarthy and congressional leaders on Monday, Yellen’s rhetoric took a more alarmist tone, saying that incoming data show it’s now “highly likely” that the government will run out of money as early as June 1.

“With an additional week of information now available, I am writing to note that we estimate that it is highly likely that Treasury will no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1,” Yellen wrote.

Yellen’s increased confidence in her X-date estimate stands in some contrast to a projection from Goldman Sachs, which expects the country to have a bit more runway—until June 8—before it runs out of money. Still, the investment bank warned that “waiting for the last minute isn’t necessarily the right move, even though we think that maybe they could go a little longer.”

McCarthy and the Republicans have been deadlocked in debt cap talks with President Joe Biden and the Democrats, with the latest negotiating session on Monday failing to deliver a breakthrough.

In seeking to push those talks forward, Yellen urged the sides to find a solution “as soon as possible” while warning that “waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.”

Already there have been signs of stress in Treasury markets, with the government’s borrowing costs for securities maturing in early June seeing a spike.

‘Productive’ Meeting But No Deal

McCarthy and Biden emerged on Monday from a 90-minute negotiating session at the White House on Monday saying that some progress had been made but with no substantial breakthrough.

The two struck somewhat optimistic tones in separate remarks to reporters after the meeting, while calling for further progress in averting a default.

“I think the tone tonight was better than any other time we’ve had discussions,” McCarthy said. “We still will have some philosophical differences, but I felt it was productive ... and I think we were able to really focus on the areas of difference.”

Biden struck a fairly optimistic note when discussing the talks, while offering hope for reaching a deal to raise the nation’s $31.4 trillion debt limit.

“I just concluded a productive meeting with Speaker McCarthy about the need to prevent default and avoid a catastrophe for our economy,” the president said in a statement on Twitter.

“We reiterated once again that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement. While there are areas of disagreement, the Speaker and I, and his lead negotiators Chairman McHenry and Congressman [Garret] Graves, and our staffs will continue to discuss the path forward.”

Rep. Patrick McHenry (R-N.C.), the lead negotiator for the Republicans, said the meeting provided some added clarity.

“We got very good direction from the speaker and from the president, the speaker to his team, and the president to his team in the same room. We’re on the same page where the same set of issues got to work through it was productive,” McHenry said.

“The teams in the room have built some level of relationship and trust that we can actually get a product that is mutually agreeable to,” McHenry added.

McCarthy declined to specify any points of agreement thus far, telling reporters on Capitol Hill that, “we don’t agree to anything until we agree to everything.”

Imminent Compromise?

In the course of the talks, Republicans have tied lifting the debt cap with spending cuts. They have been trying to persuade Democrats to accept tougher work requirements for some federal aid programs, as well as expenditure reductions.

The Republican legislative proposal—called the Limit, Save, Grow Act—pairs lifting the ceiling by $1.5 trillion with $4.5 trillion in spending cuts over a decade.

While Biden and the Democrats have insisted on a “clean” bill with no preconditions to lift the ceiling, there have been rumors that White House officials believe the president is prepared to compromise to some GOP demands to rein in spending.

McCarthy last week joked that Biden’s “secret plan” could be to wait until the last minute to pass the GOP legislative proposal.

On Monday, after the latest round of talks failed to deliver a solution to the gridlock, McCarthy said only two items are non-negotiable.

“From the first day I sat with the president, there have been two criteria. I told him we’re not going to raise taxes because we bring in more money than we ever have. And we’re not going to pass a clean debt ceiling,” McCarthy said.

“Everything else is open for negotiations. But at the end of the day, it has to fit in that place.”

White House National Economic Council Director Lael Brainard said last week that Biden’s negotiating team had been instructed not to agree to any Republican proposal on lifting the debt ceiling that would result in cuts to health care or increase the poverty rate.

Biden has repeatedly said he’s “confident” that a deal would be hammered out and that America wouldn’t default.

‘Taking Down the System’

In a recent note on the debt ceiling deadlock, analysts at ING said they believe that there’s more potential for brinkmanship before a negotiated end to the impasse.

“The problem is that the personalities involved and their entrenched positions mean it is almost impossible to believe that a deal will happen smoothly and quickly,” they wrote in a note.

“We fear that it will take significant economic and financial market stress to trigger a climbdown from the key players; perhaps a realisation that individuals responsible for any pain will be punished at the ballot box,” they added.

The ING analysts said that failure on the part of the government to pay even a single U.S. Treasury bond interest payment would risk “contaminating” the entire range of Treasury’s debt offerings to investors.

“That risks taking down the system,” they warned, though they added that this is “highly unlikely” to occur.

“But mistakes can be made,” they continued, pointing to the price action on credit default swaps as a sign of elevated market worry.

At least 70 percent of U.S. voters, meanwhile, said in a recent poll that they believe a debt default would worsen the economy, lead stock markets to drop substantially, and make borrowing more costly.

Lawrence Wilson contributed to this report.