“It is uncertain whether we could continue to meet all the nation’s commitments after that date,” Yellen wrote in the letter to House Speaker Nancy Pelosi (D-Calif.), referring to Oct. 18.
On Monday evening, Senate Republicans blocked a bill that would suspend the debt ceiling and prevent a government shutdown Friday. Senate Republicans have said they would support a stand-alone measure to extend government funding, but they largely have opposed efforts by Democrats to suspend the debt ceiling, as part of a broader campaign to undermine President Biden’s economic agenda. Senate Democrats tried to raise the debt ceiling again Tuesday afternoon, but they were blocked by Senate Minority Leader Mitch McConnell (R-Ky.) and other Republicans.
The U.S. government runs a large budget deficit, spending far more than it brings in through tax revenue. To address this imbalance, the government borrows money by issuing debt. But it can issue debt only up to a limit set by Congress. That limit is repeatedly raised or suspended, and lawmakers are now up against another cap.
If Congress does not raise the limit, the Treasury Department will not have the capability to pay all of its bills. Yellen’s new letter lays out that this crunch will really tighten after Oct. 18.
McConnell has attempted to force Democrats to raise the debt ceiling through a lengthier process known as “reconciliation,” something Senate Majority Leader Charles E. Schumer (D-N.Y.) said on Tuesday was “risky.” Senior Democrats have publicly resisted the reconciliation route, which requires only a simple majority in both the House and the Senate. But such a step was among multiple options discussed by Biden, Schumer and Pelosi in a call Monday afternoon, according to a Democratic official with knowledge of it.
No decisions were made, said the Democrat, who spoke on the condition of anonymity to discuss a private conversation. The contents of the call were first reported by Politico.
The reconciliation maneuver, which Democrats also plan to use to advance some of Biden’s spending initiatives, could span weeks and force party lawmakers to take uncomfortable political votes in the process. In private, the Democratic official said, Schumer has told other Democratic senators that the process would be “burdensome and untenable,” even as he, Biden and Pelosi discuss it as an option.
As the path forward on Capitol Hill remained unclear, Yellen warned that failure to raise the debt ceiling could have catastrophic consequences. She told lawmakers it could cause child tax credit payments to halt for 30 million families, delay Social Security payments for 50 million seniors and result in a spike in unemployment. Her warnings sent shudders through Wall Street, pushing the stock market lower as bond investors tried to recalibrate their expectations in the face of a protracted standoff.
Yellen’s letter to Congress also stressed that even narrowly avoiding a debt default could hurt taxpayers. The uncertainty around the United States’ ability to meet its payment obligations could make investors more nervous about buying U.S. debt, which would drive up borrowing costs for taxpayers for mortgages and other loans.
“We know from previous debt limit impasses that waiting until the last minute can cause serous harm to business and consumer confidence, raise borrowing costs for taxpayers, and negatively impact the credit rating of the United States for years to come,” she wrote in the letter. “Failure to act promptly could also result in substantial disruptions to financial markets, as heightened uncertainty can exacerbate volatility and erode investor confidence.”
It’s an argument that Yellen has been making to senior Republican lawmakers privately over the past several weeks, including McConnell and Rep. Kevin Brady of Texas, the ranking Republican on the House Ways and Means Committee. In those conversations, according to participants, Yellen has made a methodical, economic case for raising the debt ceiling, warning of economic calamity if the breach were to occur.
But Republicans have uniformly refused to participate, pointing to the Democrats’ solo effort to enact a separate, $3.5 trillion package funding their social-safety-net, health-care and climate priorities — even though the debt limit would have to be dealt with even if that separate bill never passes.
“Although they’d like to separate these issues out, they’re not separate,” said Sen. Mike Crapo of Idaho, the top Republican on the Senate Finance Committee, who said Yellen reached out to him early last week. “It’s our fiscal policy, our spending, our taxing and our budget. And so it has to be more than that.”
Economists have said that the U.S. economy would be plunged into an economic recession if the debt ceiling were breached. A report by Moody’s Analytics found that a default could cost the economy roughly 6 million jobs and wipe out as much as $15 trillion in household wealth.
Budget experts have said the process to pass the debt-ceiling hike could take Democratic lawmakers as long as two weeks, and it comes at a time when Democrats are simultaneously trying to advance Biden’s sprawling economic agenda. That should give them enough time to get the debt ceiling raised but very little measure for error.
While Yellen’s letter highlighted the date of Oct. 18, she stressed that fluctuations in the cash flow of the federal government — exacerbated by the pandemic — make precise predictions difficult.
“Estimates regarding how long our remaining extraordinary measures and cash may last can unpredictably shift forward or backward,” she wrote. “This uncertainty underscores the critical importance of not waiting to raise or suspend the debt limit.”
Jacqueline Alemany contributed to this report.