In the days following the November midterm elections, Treasury Secretary Janet L. Yellen was optimistic that Democrats had outperformed expectations and retained control of the Senate.
But when she traveled to the top of the Group of 20 leaders in Indonesia that month, she said Republicans taking control of the House posed a new threat to the US economy.
“I always worry about the debt ceiling,” Ms. Yellen told The New York Times in an interview on her flight from New Delhi to Bali, Indonesia, urging Democrats to use up their remaining time in control of Washington. use to pay off the debt. limit after the 2024 election. “Any way Congress can find to get it done, I’m all for that.”
Democrats heeded Ms. Yellen’s advice. Instead, the United States has been on the brink of default for most of this year as Republicans refused to raise or suspend the country’s $31.4 trillion borrowing limit without limiting spending and cutting parts of the to reverse President Biden’s agenda. Talks between the White House and Republicans in Congress about a possible deal to raise the debt ceiling continued Saturday.
Now the federal government’s cash balance has fallen below $40 billion. And on Friday, Ms Yellen told lawmakers that the X date — the point at which the Treasury Department runs out of money to pay all its bills on time — will arrive on June 5.
Ms Yellen kept her contingency plans close to the vest, but admitted this week that she had been thinking about how to prepare for the worst. At a meeting of the WSJ CEO Council, the Treasury Secretary explained the difficult decisions she would face if the Treasury were forced to choose which bills to prioritize.
Most market observers expect the Treasury Department to choose to pay interest and principal to bondholders before other bills are paid, but Ms Yellen would say only that she would be faced with “very difficult choices”.
White House officials have declined to say whether a contingency plan is underway. Early this year, Biden administration officials said they had no intention of prioritizing payments. As the US moves closer to bankruptcy, the Treasury Department declined to say whether that has changed.
Still, former Treasury and Federal Reserve officials said contingency plans were almost certain to be devised.
Christopher Campbell, who served as Assistant Treasury Secretary for Financial Institutions from 2017 to 2018, said that given the fast-approaching X date, “one would expect” that “there would be quiet talks between the Treasury Department and the White House about how they would manage a technical glitch and maybe prioritize payments.
The Treasury Department has developed a standard playbook based on previous debt limit deadlocks in 2011 and 2013. And Ms Yellen has become quite familiar with that: during the last two major standoffs – in 2011 and 2013 – she was a top official of the Federal Reserve thinking about how the central bank would try to contain the consequences of a default.
Ms. Yellen was briefed on the Treasury’s plans during those debates and participated in her own emergency discussions about how to stabilize the financial system in the event that the United States was unable to pay all its bills on time.
Indeed, according to the Fed’s transcripts, the Treasury Department intended to prioritize the payment of principal and interest to bondholders in the event that the X date was violated. While Treasury Department officials were hesitant about the idea, they had told Fed officials it could eventually be done.
Fed officials also discussed steps they could take to stabilize money markets and prevent failed Treasury auctions from leading to bankruptcy, even if the Treasury Department successfully paid creditors. Ms Yellen said in both 2011 and 2013 that she was on board with plans to protect the financial system.
“I expect that this kind of action may prove unnecessary after the Treasury has finally declared their intention to pay principal and interest on time and we have finally issued our own set of policy statements,” Ms Yellen said in 2011. But if stress does escalate, I would support interventions to ease the pressure on money market funds.”
Ms Yellen added that she was concerned about the vulnerability of market infrastructure in the event of a default, saying officials should think about ways to plan for a default in the future.
“As we could face a similar situation at some point in the future, I think it is important for us to reflect on the lessons learned so that we and the markets are better prepared if we face such a situation again. get,” said Ms Yellen.
Eric Rosengren, who served as president of the Federal Reserve Bank of Boston in 2011, said in an interview that he expected Ms. Yellen, known for her rigorous preparation, to be considering contingency plans, as she has been at the Fed more than did. a decade ago.
“It would be irrational not to plan,” Mr Rosengren said, adding that Ms Yellen’s background in dealing with financial stability issues puts her well placed to be as prepared as possible for the fallout from bankruptcy. “The last thing you want is to be completely unprepared and have the worst outcome.”
As the deadlock over the debt ceiling has deepened, Ms. Yellen has not been as involved in negotiations with lawmakers as some of her predecessors.
Biden enlisted Shalanda Young, his budget director, and White House adviser Steven J. Ricchetti to lead negotiations with House Republicans. Ms Yellen has not attended the Oval Office meetings between Mr Biden and Republicans.
“From the outside, it doesn’t look like Yellen is taking an active role in the budget negotiations,” said David Wessel, a senior economics officer at the Brookings Institution who worked with Ms. Yellen at Brookings. “It could be that it’s not her comparative advantage, it could be that the White House wants to do it themselves, and it could be that they want to protect the credibility of the Treasury Department by predicting the X-date.”
Ms. Yellen has played a more behind-the-scenes role, briefing the White House on the nation’s cash reserves, calling corporate executives asking them to urge Republicans to lift the debt limit, and increasingly sending letters to Congress declaring will be alerted 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 limit on Sunday morning talk shows, coordinating daily with White House Chief of Staff Jeffrey D. Zients and Lael Brainard , the director of the National Economic Council, to outline the government’s strategy. Other officials have participated in the Oval Office meetings because the White House still considers them budget negotiations, the official added.
The Treasury Secretary also interrupted a recent trip to Japan for a meeting of the Group of 7 Treasury Ministers so she could return to Washington to address the debt cap.
Despite Ms Yellen’s efforts to avoid the debt limit politics, Republicans have cast doubts on her credibility.
Members of the House Freedom Caucus recently wrote a letter to Speaker Kevin McCarthy urging Republican leaders to demand that Ms. justifies”. , they accused her of “manipulative timing” and suggested that her forecasts should not be trusted because she was wrong about how hot inflation was going to get.
The letter Ms Yellen sent on Friday included a specific deadline – June 5 – and listed the upcoming payments the federal government must make and explained why the Treasury Department would not be able to cover its debts after that date.
Representative Patrick T. McHenry, a North Carolina Republican who is helping lead the negotiations, said Friday that the specific default term was helpful and called Ms. Yellen a person of principle who is loyal to the law.
“It maintains and ensures urgency,” he said.
Republicans have also focused on some of Ms. Yellen’s most valued policy priorities during the negotiations, such as reversing some 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, 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 complained that Republicans were aiming for the money.
“Something of great concern to me is that they have even been in favor of scrapping funding provided to the IRS to tackle tax fraud,” she said.
Whenever the gridlock over the debt limit eases, Democrats will most likely come under renewed pressure to review the laws governing the nation’s borrowing the next time they check 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 she was in favor of abolishing the borrowing ceiling.
“I believe that when Congress regulates spending and enacts tax policies that determine taxes, those are the critical decisions that Congress makes,” Ms. Yellen said at a House Financial Services Committee hearing. “And if to fund those spending and tax decisions it is necessary to issue additional debt, I think it is very destructive to put the president and myself, as Treasury Secretary, in a situation where we may not be in be able to pay the bills that result from those past decisions.
