In the days after November’s midterm elections, Treasury Secretary Janet L. Yellen was thrilled that Democrats were doing better than expected. maintained control senate.
But when she traveled to a summit of Group of 20 leaders in Indonesia that month, she said the Republican takeover of the House of Representatives posed a new threat to the U.S. economy.
“I’m always worried about the debt ceiling,” Ms. Yellen he 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 repeal the debt limit after the 2024 elections. .”
Democrats did not heed Ms. Yellen’s advice. Instead, the United States has spent much of this year teetering on the brink of insolvency as Republicans have refused to raise or suspend the nation’s $31.4 trillion borrowing limit without curbing spending and undoing parts of President Biden’s agenda.
The federal government’s cash balance has now fallen below $40 billion. And on Friday, Ms. Yellen told lawmakers that the X-date – the point at which the Treasury runs out of enough money to pay all its bills on time – will arrive by June 5.
Ms Yellen is keeping her contingency plans close to the vest, but indicated this week that she was thinking about how to prepare for the worst. Speaking at a WSJ CEO Council event, the Treasury Secretary explained the difficult decisions she would face if Treasury were forced to choose which prioritize accounts.
Most market watchers expect the Treasury to decide to pay interest and principal to bondholders before paying other bills, but Ms. Yellen would only say that she would face “very tough choices.”
White House officials declined to say whether any contingency planning was underway. Earlier this year, Biden administration officials said they had no plans to prioritize payments. As the US neared default, the Treasury declined to say whether that had changed.
Still, former Treasury and Federal Reserve officials said it was almost certain that contingency plans were being drawn up.
Christopher Campbell, who served as Under Secretary of the Treasury for Financial Institutions from 2017 to 2018, said that with X-Date fast approaching, one would “expect” that there would be “quiet conversations between the Treasury Department and the White House about how it would handle technical failure and possibly payment prioritization.”
The Treasury Department developed the default playbook from previous debt-limit failures in 2011 and 2013. And Ms. Yellen is quite familiar with them: During the last two major standoffs — in 2011 and 2013 — she was the top Federal Reserve official and wondered how the central bank would try to limit the fallout from failure.
Ms. Yellen was briefed on the Treasury’s plans during those debates and engaged in her own contingency discussions about how to stabilize the financial system in the event that the United States is unable to pay all of its bills on time.
According to Fed transcriptsThe Treasury actually planned to prioritize principal and interest payments to bondholders in the event of an X-date breach. Although Treasury officials were concerned about the idea, they expressed to Fed officials that it could eventually be done.
Fed officials also discussed steps they could take to stabilize money markets and prevent failed Treasury auctions from triggering defaults even as the Treasury 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 actions of this type may prove unnecessary after the Treasury Department finally says they intend to pay back principal and interest on time, and we finally issue our own set of policy statements,” Ms. Yellen said in 2011. if if stress nevertheless escalated, I would support interventions to ease pressures on money market funds.”
Ms. Yellen added that she was concerned about how vulnerable the market infrastructure was in the event of a failure, and said officials should think about ways to plan for future failures.
“Given that we could face a similar situation somewhere in the future, I think it’s important that we think about the lessons so that we and the markets are better prepared if we do face a situation like this again,” Ms. Yellen said.
Eric Rosengren, who was president of the Federal Reserve Bank of Boston in 2011, said in an interview that he expected Ms. Yellen, who is known to be meticulously prepared, was busy considering contingency plans, as she had done at the Fed more than before ten years.
“It would be irrational not to do some planning,” Mr. Rosengren said, adding that because Ms. Yellen is dealing with financial stability issues, she is well placed to be as prepared as possible for a default to fall. “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 as involved in dealing with lawmakers as some of her predecessors.
tapped Mr. Biden Shalanda Young, his budget director, and Steven J. Ricchetti, White House counsel, 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 look like Yellen is playing an active role in the budget negotiations,” said David Wessel, a senior economist at the Brookings Institution who worked with Ms. Yellen at Brookings. “It might not be her comparative advantage, it might be that the White House wants to do it themselves, and it might be that they want to protect the credibility of the Treasury Department predicting the X-date.”
Ms. Yellen has taken 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 lift the debt limit, and sending increasingly regular letters to Congress warning when the federal government will be unable to pay all your accounts.
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 and that she coordinates on a daily basis with Jeffrey D. Zients, the White House chief of staff, and Lael Brainard, director of the National Economic Council, to outline administration strategy. Other officials also attended the Oval Office meetings because the White House continues to view them as budget negotiations, the official added.
The finance minister also cut short a recent trip to Japan for a meeting of Group of 7 finance ministers to return to Washington to tackle the debt limit.
Despite Ms. Yellen’s efforts to avoid politics around the debt limit, Republicans express 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 US could run out of money as soon as June 1. , accused her of “manipulative timing” and suggested her forecasts should not be trusted because she was wrong about how high inflation would be.
The letter Ms. Yellen sent on Friday set a specific deadline — June 5 — and outlined the upcoming payments the federal government is required to make and explained why the Treasury Department will not be able to service its debt after that date.
Representative Patrick T. McHenry, a North Carolina Republican helping to lead the negotiations, said Friday that 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 come due.
“There was some skepticism about the timescale — that you can pick and choose what you want,” he said. “It doesn’t work that way.
Republicans also focused on some of Ms. Yellen’s most valuable policy priorities during the talks, such as returning some of the $80 billion the Internal Revenue Service received under last year’s inflation-reduction law.
The White House appears prepared to return $10 billion of those funds, which are intended to strengthen the agency’s ability to catch tax cheats, in exchange for preserving other programs.
In an interview with NBC’s Meet the Press this week, Ms. Yellen lamented that Republicans are targeting money.
“Something that I’m very concerned about is that they were even in favor of eliminating the funding that was given to the Internal Revenue Service to crack down on tax fraud,” she said.
Whenever the debt ceiling stalemate subsides, Democrats will most likely come under renewed pressure to overhaul the laws that govern government borrowing the next time they control the White House and Congress. In 2021, Ms. Yellen, worried that the fight over the debt limit would put her in the precarious position she now faces, has said she supports lifting the borrowing limit.
“I believe that when Congress enacts spending and enacts tax policy that determines taxes, those are the major decisions that Congress makes,” Ms. Yellen said at a hearing of the House Financial Services Committee. “And if additional debt has to be issued to finance these spending and taxing decisions, I think it’s very destructive to put the president and myself as Treasury Secretary in a situation where we might not be able to pay the bills resulting from those past decisions.”