Treasury secretary Janet Yellen has warned that the US risks running out of money by October 18 as Senate Republicans blocked attempts to increase the borrowing limit and stave off a government shutdown.
“At that point, we expect Treasury would be left with very limited resources that would be depleted quickly,” she said in a letter to congressional leaders. “It is uncertain whether we could continue to meet all the nation’s commitments after that date.
“We know from previous debt limit impasses that waiting until the last minute can cause serious 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.
“Failure to act promptly could also result in substantial disruptions to financial markets, as heightened uncertainty can exacerbate volatility and erode investor confidence.”
Yellen reiterated her warnings during testimony before the Senate banking committee, saying a default “would undermine confidence in the dollar as the reserve currency, and the interest payments of ordinary Americans on their mortgages and on their cars and on their credit cards would all go up in line with higher Treasury borrowing costs.”
Late on Monday, a bill to raise the US borrowing limit failed to pass the Senate’s 60-vote filibuster threshold, with Republicans in the upper chamber of Congress voting to reject the measure. A subsequent attempt in the Senate to quickly approve a debt-ceiling suspension on Tuesday also failed.
Democrats, who control the Senate by the slimmest of margins, are now under pressure to raise the borrowing limit on their own and avert a government shutdown ahead of a 12.01am deadline on Friday.
When asked about possible contingency plans that the Fed has previously considered in the event of a default, which include the central bank buying defaulted Treasuries and selling securities owned by the Fed, Jay Powell, the central bank’s chair, said it had limited ability to reduce the extent of the damage.
“These are things that we really would not like to do,” said Powell, who appeared alongside Yellen at Tuesday’s hearing.
Other top Fed officials have also recently warned lawmakers of potentially severe consequences if no agreement is reached.
On Monday, John Williams, the president of the Federal Reserve Bank of New York, said investors could become “extremely nervous”, leading to an “extreme kind of reaction in markets”. Lael Brainard, Federal Reserve governor, on Monday said Congress “needs to step up”.
Business leaders have also expressed concern about a potential default. A failure to raise the US debt ceiling would pose an “unacceptable” risk to the US economy, one of Washington’s leading business lobby groups warned on Tuesday.
The Business Roundtable, which represents more than 200 chief executives of large US companies, called on lawmakers to “just get it done”.
“We’d be delighted to see this done on a bipartisan basis but if it has to be done on a partisan basis, so be it,” said Joshua Bolten, the BRT’s chief executive.
Jamie Dimon, chief executive of JPMorgan Chase, the largest US bank, told Reuters on Tuesday the lender had started to prepare for the “potentially catastrophic event” of a US credit default on financial markets, client contracts and capital ratios.
“Every single time this comes up, it gets fixed, but we should never even get this close. I just think this whole thing is mistaken and one day we should just have a bipartisan bill and get rid of the debt ceiling. It’s all politics,” Dimon said in the interview.
Morgan Stanley has also been planning for the possibility of a US credit default, a spokesperson said.
During his testimony to the committee on Tuesday, Powell warned that elevated price pressures stemming from pandemic-related disruptions were persisting longer than anticipated.
Powell acknowledged that the economy was becoming stronger, but warned of the risk that inflation could stay higher for longer than anticipated as the more contagious Delta coronavirus variant further affected supply chains.
“As reopening continues, bottlenecks, hiring difficulties and other constraints could again prove to be greater and more enduring than anticipated, posing upside risks to inflation,” he said.
“If sustained higher inflation were to become a serious concern, we would certainly respond and use our tools to ensure that inflation runs at levels that are consistent with our goal.”
His comments come on the heels of the latest meeting on monetary policy last week, where the Fed signalled that it would soon begin reducing, or “tapering”, the $120bn-a-month asset purchase programme it put in place last year and pledged to continue until it saw “substantial further progress” towards inflation averaging 2 per cent and maximum employment.
Projections released last week suggested that more Fed officials now believe that an interest rate increase could be appropriate next year, with at least three rises pencilled in by the end of 2023.
Additional reporting by Joshua Franklin in New York