Yellen Renews Debt-Limit Plea With August Default Possible

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Treasury Secretary Janet Yellen said her department may exhaust emergency measures to avoid breaching the U.S. debt limit as soon as August unless Congress acts to avert a potential default that would be “catastrophic.”

“Defaulting on the national debt should be regarded as unthinkable,” Yellen said Wednesday before a Senate Appropriations subcommittee hearing on her department’s budget.

“Failing to increase the debt limit would have absolutely catastrophic economic consequences,” she added. “It would precipitate a financial crisis. It would threaten the jobs and savings of Americans -- and at a time when we’re still recovering from the Covid pandemic.”

The current suspension of the U.S. debt limit ends July 31. Unless it’s raised or suspended again, the Treasury would then be barred from borrowing funds to cover government expenses. Once special steps to shift federal funding and avoid breaching the limit are exhausted, the government could default on maturing debt repayments.

“It’s possible we could reach that point while Congress is out in August, and I would really urge prompt action on raising the limit or suspending it,” Yellen said. That’s more specific than a previous comment that special measures could run out during the summer.

Congress is scheduled to return to Washington in mid-September following its annual August recess.

Treasury bills due in August were little changed following Yellen’s remarks, although the comments may sharpen investor focus on a sale of eight-week debt slated to take place Thursday.

“Endangering the full faith and credit of our country is not an option right now, especially as the federal government leads our nation’s recovery from this pandemic,” House Ways and Means Committee Chairman Richard Neal said in a statement Wednesday following Yellen’s remarks.

“We cannot let brinkmanship risk the progress we’ve made, and must address the debt limit before the current suspension expires next month,” said Neal, a Massachusetts Democrat.

Earlier in the day, Representative Hakeem Jeffries, a member of the House Democratic leadership, told reporters that “there has been no conversation on the debt ceiling yet.”

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