The U.S. is expected to reach its borrowing limit next Thursday, forcing the government to start using “extraordinary measures” to prevent a default on its debt, Treasury Secretary Janet Yellen told congressional leaders Friday.
The move will accelerate the debate in Congress about how to pass a debt limit increase. The stakes are high because conservative House Republicans have made clear they want to attach government spending cuts to any such legislation now that the party is in the majority, against the wishes of the Biden administration.
The Biden administration is rejecting any such conditions. “There’s going to be no negotiation over it,” White House spokesperson Karine Jean-Pierre told reporters Friday. “This is something that must be done.”
The Treasury only has a finite amount of time to avoid a default using extraordinary measures — in this case, suspending investments in certain government retirement funds. Estimates are that the “X date” could be hit around the middle of this year. Yellen said it is unlikely that cash and extraordinary measures will be exhausted before early June.
“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability,” she said.
Yellen’s letter formally kicked off what’s expected to be the most contentious debt ceiling battle in history, even after a series of recent episodes where Republican opposition brought the U.S. to the brink of being unable to pay its bills.
The stakes are higher than ever in the wake of the House GOP’s protracted fight over whether to elect Kevin McCarthy as speaker to run the chamber. The California Republican’s fraught path to the speakership empowered hardline conservatives who want to use the debt limit to extract spending cuts — an approach McCarthy has endorsed.
The fight is a looming cloud over the economy because the market for U.S. Treasury securities is a bedrock of the global financial system, and volatility could impact lending products like mortgages. White House officials have started eyeing moderate Republicans who might be helpful in a deal to raise the debt limit.
The debt ceiling is the legal limit in which the U.S. can borrow to pay for its existing obligations, including Social Security, Medicare and military salaries. The current limit is nearly $31.4 trillion.
A missed government debt payment carries significant risk, though Wall Street analysts are split on whether this current episode will cause economic armageddon.
Some analysts warn that market turbulence could ensue even if the U.S. doesn’t technically default but is forced to use unprecedented maneuvers to avoid missing payments.
“In all the previous debt ceiling episodes, I always felt like at the end of the day, I understood the need for the theatrics, but I could see a landing zone for how it gets resolved,” said Elliot Hentov, head of policy research at State Street Global Advisors. “Here, I don’t see that yet, and it makes me quite uncomfortable.”