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Yellen warns Treasury could hit debt ceiling as early as June

Agency will need to start deploying ‘extraordinary measures’ to stay under cap on Thursday

Treasury Secretary Janet L. Yellen prepares to testify before the Ways and Means Committee on June 8, 2022.
Treasury Secretary Janet L. Yellen prepares to testify before the Ways and Means Committee on June 8, 2022. (Tom Williams/CQ Roll Call file photo)

Treasury Secretary Janet L. Yellen told lawmakers Friday that the department will be forced to deploy “extraordinary measures” next week to keep from exceeding the $31.4 trillion statutory borrowing cap but that those accounting tools may not last beyond early June.

Yellen’s letter is the starting gun of sorts for potential negotiations between House Republicans, the Senate and administration over what, if any, conditions Democrats might accept in return for raising the debt limit.

After winning control of the House, GOP lawmakers have made clear they intend to extract concessions for a debt limit increase that could include spending cuts, a crackdown on illegal immigration or other measures. Both the White House and congressional Democrats have said they won’t negotiate over the debt limit.

Pennsylvania Democrat Brendan F. Boyle, ranking member of the House Budget Committee, reacted to the Treasury letter with a statement slamming Republicans for “thinking it’s acceptable to use our economy as a political hostage to try and force an extremist and deeply unpopular agenda.”

He said GOP lawmakers “need to do the right thing and come to the table to raise the borrowing limit before it’s too late — before our economy and millions of American jobs have been put at risk.”  

Debt subject to limit, which includes borrowing from the public as well as from government trust funds, stood $78 billion below the borrowing cap as of Wednesday. Congress last raised the debt ceiling in December 2021, by $2.5 trillion.

Beginning Thursday, Yellen wrote, Treasury will reach the $31.4 trillion ceiling and have to start deploying extraordinary measures to remain under the cap.

Those include commonly used methods such as cashing out existing and suspending new investments of the federal employee retirement and disability trust fund and a separate fund for postal retiree health benefits. Treasury will also suspend reinvestment of securities held in separate retirement savings funds for federal workers. Once the debt ceiling is lifted and Treasury is able to borrow again, those funds are made whole.

Yellen wrote that how long the extraordinary measures last is “subject to considerable uncertainty” and the early June time frame is just the agency’s best guess at the moment.

The Bipartisan Policy Center estimated last June that the “x date,” when the Treasury would run out of borrowing room and enough cash to pay all its bills, would not occur until at least the third quarter of this year.

In a call with reporters Friday, Shai Akabas, the BPC’s director of economic policy, said due to President Joe Biden’s multiple student loan suspensions, high inflation and interest rates, “the situation has deteriorated somewhat relative to our projection eight months ago.”

But he said that does not necessarily mean the Treasury would run out of resources before July 1. The BPC plans to update its forecast after seeing the Congressional Budget Office’s projections of spending and revenue when they are released next month.

Akabas said he is particularly interested in CBO’s revenue projections.

“What we are looking for is what they expect will happen during this tax season,” he said. “Last tax season we had an influx of revenues that went beyond what most estimates were projecting, and this year it will be interesting to see whether they are projecting the same or a variation from that.” 

Lou Crandall, chief economist for Wrightson ICAP, estimated this week that Treasury would hit the “x date” in August, with the caveat that forecasts continue to evolve.

And based on the 15 rounds of balloting it took for California Republican Kevin McCarthy to secure the votes to be elected speaker last week, Crandall said raising the debt limit could be a long and tumultuous process.

“The third quarter is when the final chapter of this year’s debt ceiling saga will begin, but not necessarily when it will end,” Crandall wrote in a report Jan. 9. He said a “dysfunctional Congress could force the Treasury to live hand-to-mouth through a series of interim debt ceiling increases for weeks or even months.”

Akabas declined to take sides on whether there should be any conditions attached to a debt limit increase.

But he said the need to raise the borrowing ceiling provides an opening to find solutions to what he said is an “unsustainable fiscal path.”

“It is certainly a time for policymakers to begin negotiations” over the debt limit, he said. “We have seen all too many times that they end up at the 11th hour with their backs against the wall and no resolution in sight. There’s plenty of time to avoid that outcome.”  

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