Yellen’s debt limit warnings went unheeded, leaving her to face fallout

In the days after November’s midterm elections, Treasury Secretary Janet Yellen was feeling upbeat about the fact that Democrats had performed better than expected and maintained control of the Senate.

But as she traveled to the Group of 20 leaders summit in Indonesia that month, she said Republicans taking control of the House posed a new threat to the U.S. economy.

“I always worry about the debt ceiling,” Yellen told The New York Times in an interview, in which she urged Democrats to use their remaining time in control of Washington to lift the debt limit beyond the 2024 elections. “Any way that Congress can find to get it done, I’m all for.”

Democrats did not heed Yellen’s advice. Instead, the United States has spent most of this year inching toward the brink of default, as Republicans refused to raise or suspend the nation’s $31.4 trillion borrowing limit without capping spending and rolling back parts of President Joe Biden’s agenda.

Now the federal government’s cash balance has fallen below $40 billion. And Friday, Yellen told lawmakers that the X-date – the point at which the Treasury Department runs out of enough money to pay all its bills on time – will arrive by June 5.

Yellen has held her contingency plans close to the vest but signaled this week that she had been thinking about how to prepare for the worst.

The Treasury Department has developed a default playbook from previous debt limit standoffs in 2011 and 2013. And Yellen has become quite familiar with those: During the last two significant standoffs – in 2011 and 2013 – she was a top Federal Reserve official contemplating how the central bank would try to contain fallout from a default. Still, Yellen said she was concerned about how vulnerable market infrastructure was in the event of a default and said officials should be thinking about ways to plan for a default in the future.

“Given that we could face a similar situation somewhere down the road, I think it’s important for us to think about lessons learned so that we and markets will be better prepared if we face such a situation again,” Yellen said.

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