‘Disaster economic consequences’ if the debt is not increased on October 18

'Disaster economic consequences' if the debt is not increased on October 18

“Failing to increase the debt limit would have catastrophic economic consequences,” Yellen told the Senate Banking Committee on Tuesday.

[Read: What is the debt ceiling?]

Congress has had a history of avoiding a breach in the debt ceiling, often times supporting a change in the statutory limit on a bipartisan basis. Source: U.S. Office of Management and Budget, The Washington Post

With payments due on U.S. Treasury securities (which the Treasury issues to finance the government), the Treasury resorted to its cash reserves and “extraordinary measures” to pay the bills. Once those emergency tools are exhausted, the Treasury says it will fail to make its payments, risking an outright default.

Story Highlights

  • Secretary of the Treasury Janet Yellen said that if Congress does not raise the debt ceiling, the Treasury will run out of emergency funds to pay U.S. debt holders by that date.

  • In August, a statutory limit on federal debt — called the debt ceiling — was reinstated, despite the need to continue financing pandemic-era spending authorized by both the Trump and Biden administrations.

Yellen told the Senate Banking Committee that default could disrupt the market for U.S. Treasuries, seen as one of the most liquid markets in the world.

“It would be a financial crisis and a calamity,” Yellen said.

Yellen detailed the Treasury’s estimates of an Oct. 18 date in a letter to U.S. House of Representatives Speaker Nancy Pelosi, which explained that variability in the government’s cash flows could make that date too early or too late. She urged Congress to move quickly on raising the debt limit. Meanwhile, Senate Majority Leader Chuck Schumer started forming plans to lower the vote threshold for a vote on the debt limit. Senate rules typically require 60 votes to support such a measure, but Schumer hopes to lower that to a simple majority — which would make it easier for the Democrats to jam a vote through, given the 50-50 balance in the chamber.

Story continues Yellen appeared in front of the Senate Banking Committee alongside Fed Chairman Jerome Powell, who agreed that a government default would be disastrous.

“The potential effects could be severe,” Powell said Tuesday. Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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