Yellen’s Debt Limit Warnings Went Unheeded, Leaving Her to Face Fallout

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Yellen’s Debt Limit Warnings Went Unheeded, Leaving Her to Face Fallout

In the days following the November midterm elections, Treasury Secretary Janet L. Yellen expressed optimism that Democrats had done better than expected and retained control of the Senate.

But traveling to the summit of G20 leaders in Indonesia this month, she said the Republican takeover of control of the House of Representatives poses a new threat to the US economy.

“I’m always worried about the debt ceiling,” Ms. Yellen told The New York Times in an interview on her flight from New Delhi to Bali, Indonesia, in which she urged Democrats to use their remaining time in power over Washington to pay off the debt limit beyond the 2024 elections. “Any way Congress can find to make that happen, I’m all for it.”

Democrats didn’t heed Yellen’s advice. Instead, the United States has spent most of this year slowly nearing the brink of default as Republicans refused to raise or suspend the country’s $31.4 trillion borrowing limit without spending and scale back parts of President Biden’s agenda. Talks between the White House and Republicans in Congress over a possible deal to raise the debt ceiling continued Saturday, with President and Speaker Kevin McCarthy speaking by phone in the evening.

Now the federal government’s treasury is below $40 billion. And on Friday, Ms Yellen told lawmakers the X-date – the point at which Treasury will no longer have enough money to pay all of its bills on time – will occur on June 5.

Ms Yellen has kept her contingency plans a secret but signaled this week that she has been thinking about how to prepare for the worst. At an event hosted by the WSJ’s CEO Council, the Treasury Secretary laid out the difficult choices she would face if the Treasury Department were forced to decide which bills to prioritize.

Most market observers assume that the Treasury would choose to make interest and principal payments to bondholders before paying other bills. However, Ms Yellen would only say that she was faced with “very difficult decisions”.

White House officials declined to say if contingency planning was underway. Earlier in the year, Biden administration officials said they had no plans for prioritizing payments. As the US nears default, the Treasury declined to say if anything has changed.

Still, former Treasury and Federal Reserve officials said it was almost certain contingency plans would be put in place.

Christopher Campbell, who served as deputy treasury secretary for financial institutions from 2017 to 2018, said that with the X-date fast approaching, one would “expect” that “there would be quiet discussions between the Treasury Department and the White House about how they do.” would handle a technical failure and possibly prioritization of payments.”

The Treasury developed standard guidance from previous debt ceiling standoffs in 2011 and 2013. And Ms. Yellen has become quite familiar with it: During the last two significant standoffs — 2011 and 2013 — she was a senior Federal Reserve official and pondered how the central bank would try to contain the consequences of a default.

Ms. Yellen was briefed on Treasury Department plans during these debates and engaged in emergency talks of her own about how to stabilize the financial system in the event the United States fails to pay all of its bills on time.

According to the Fed’s minutes, the Treasury had indeed planned to prioritize principal and interest payments to bondholders in the event of an X-date violation. Although Treasury officials had concerns about the idea, they had expressed to Fed officials that it could ultimately go ahead.

Fed officials also discussed actions they could take to stabilize money markets and prevent failed Treasury auctions from resulting in a default, even if the Treasury successfully settles creditors. Ms Yellen said in both 2011 and 2013 that she supported plans to protect the financial system.

“I anticipate that now that the Treasury Department has finally stated that it intends to pay principal and interest on time and we have finally issued our own policy statements, action of this nature may well prove to be unnecessary,” Ms Yellen said in 2011. “But should stress escalate, I would support interventions to ease pressure on money market funds.”

Ms Yellen added she was concerned about how vulnerable the market infrastructure was in the event of a default and said officials should consider how to plan for a default in the future.

“Given that we could face a similar situation at some point in the future, I think it’s important that we reflect on the lessons learned so that we and the markets are better prepared if we are faced with such a situation again.” confronted,” said Ms. Yellen.

Eric Rosengren, who was President of the Federal Reserve Bank of Boston in 2011, said in an interview he expects Ms. Yellen, who is known for her thorough preparation, to be more than busy considering contingency plans, as was the case at the Fed 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 in a good position to be as prepared as possible for the consequences of a default. “The last thing you want is to be completely unprepared and get the worst possible result.”

As the debt ceiling intensified, Ms. Yellen was not as involved in negotiations with lawmakers as some of her predecessors.

Mr. Biden hired Shalanda Young, his budget director, and Steven J. Ricchetti, the White House adviser, to lead negotiations with Republicans in the House of Representatives. Ms. Yellen did not attend the Oval Office meetings between Mr. Biden and the Republicans.

“From the outside, it doesn’t look like Yellen will play an active role in the budget negotiations,” said David Wessel, a senior economics fellow at the Brookings Institution who worked with Ms. Yellen at Brookings. “It may not be their comparative advantage, it may be that the White House wants to do it themselves, and it may be that they want to protect the credibility of the Treasury Department predicting the X-date.”

Ms. Yellen has taken on a more behind-the-scenes role, briefing the White House on the country’s cash reserves, calling business leaders urging them to urge Republicans to lift the debt ceiling and increasingly sending letters to Congress stating she warned when the federal government will not be able to pay all of his bills.

A White House official pointed out that Ms. Yellen was the Biden administration’s chief ambassador on Sunday morning talk shows on the debt limit and that she coordinates daily with White House chief of staff Jeffrey D. Zients. and Lael Brainard, the director of the National Economic Council, to formulate the government’s strategy. Other officials 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 Seven finance ministers so she could return to Washington to deal with the debt ceiling.

Despite Ms. Yellen’s efforts to walk away from politics surrounding the debt ceiling, Republicans have questioned her credibility.

Members of the House Freedom Caucus recently wrote a letter to Mr. McCarthy urging Republican leaders to demand from Ms. Yellen a “full justification” of their earlier forecast that the US could run out of money as early as June 1. In the letter, they accused her of “manipulative timing” and suggested not trusting her forecasts because she was wrong about how high inflation would get.

The letter, which Ms Yellen sent on Friday, gave a specific deadline – June 5 – and listed the forthcoming payments the federal government must make, explaining why beyond that date the Treasury Department would be unable to to pay off his debts.

Rep. Patrick T. McHenry, a North Carolina Republican who is chairing the negotiations, said Friday that the specific standard deadline was helpful and called Ms. Yellen a principled person loyal to the law.

“It maintains the urgency and ensures it,” he said.

Republicans have also targeted some of Ms. Yellen’s top policy priorities in the negotiations, such as repatriating some of the $80 billion the Internal Revenue Service received under the Inflation Reduction Act last year.

The White House appears willing to return $10 billion of those funds, which are designed to bolster the agency’s ability to uncover tax cheats, in exchange for maintaining other programs.

In an interview on NBC’s Meet the Press this week, Ms Yellen lamented that Republicans were after the money.

“What worries me a lot is the fact that they even came out in favor of removing the funds that have been made available to the Internal Revenue Service to fight tax fraud,” she said.

Once the debt-ceiling dispute abates, Democrats will most likely come under renewed pressure to revise the laws governing the country’s borrowing the next time they control the White House and Congress. Fearing that a dispute over the debt limit would put her in the precarious position she is in now, Ms Yellen said in 2021 that she supports removing the credit limit.

“I believe when Congress enacts spending legislation and implements tax policies that determine taxes, those are the key decisions that Congress makes,” Ms. Yellen said at a hearing of the House Financial Services Committee. “And if it is necessary to take on additional debt to fund those spending and tax decisions, I think it’s very destructive to put the President and I, as Treasury Secretary, in a situation where we may not be able to support the resulting.” Paying bills.” Those past choices.”