U.S. Hits Debt Ceiling - Default Fears

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The Treasury Department started taking so-called extraordinary measures to keep paying the federal government’s bills as the U.S. hit its debt limit Thursday, Treasury Secretary Janet Yellen said.

In a letter addressed to House Speaker Kevin McCarthy, R-Calif., Yellen said the Treasury will suspend new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund from Thursday until June 5, 2023. But she warned both moves are subject to “considerable uncertainty” if Congress does not pass a bill to increase the $31.4 trillion debt ceiling.

The Treasury secretary told lawmakers Friday that she believes the extraordinary steps could allow the government to pay its obligations until early June. Yellen last week urged Congress to “act in a timely manner to increase or suspend the debt limit,” as failing to do so could lead to a first-ever default on U.S. debt and cause economic damage around the world.

The Treasury secretary warned last week that the U.S. government would hit the statutory debt ceiling on Thursday, after which extraordinary measures would be taken to keep the government from defaulting on its debt obligations.

The U.S. government has not defaulted on its debt, but the debt ceiling has been raised 22 times from 1997 to 2022, according to the Government Accountability Office. The Biden administration will prioritize negotiations for a new bill to increase the debt limit after the mid-April tax deadline, according to a senior White House official.

Concessions sought by the new Republican House majority have led to concerns that Congress could have trouble raising the debt ceiling before June. Certain GOP lawmakers have said they want to slash spending as part of an agreement to increase the borrowing limit.

Some Republican representatives have said major spending cuts to key government programs like Medicare and Social Security were part of the negotiations that helped McCarthy secure support from hard-line conservatives and win the speakership.

McCarthy has called for cuts to avoid bankrupting programs like Medicare and Social Security.

The debt ceiling limits the level of debt the federal government can assume. Lifting it ensures the government can continue to borrow — not spend — to meet its budgeted goals.

Congress will have a shorter-than-expected window to negotiate a debt limit increase this year thanks to policy decisions by both the Biden administration and the Federal Reserve.

The impact of two costly moves on the government’s finances — President Joe Biden’s decision to extend a federal student loan payment freeze plus the Fed’s rapid interest rate hikes — are under scrutiny as analysts gauge precisely when the U.S. will run out of money to pay its bills.

Identifying that deadline, known as the “X date,” is crucial as House Republicans and the White House enter a stalemate over how to raise the government’s borrowing authority.

But the deadline with the most political significance is the X date.

The Bipartisan Policy Center think tank, a go-to resource for identifying that deadline, expects it will hit sooner than it initially thought thanks to the student loan freeze, which halted incoming government payments from millions of borrowers, and the Fed’s inflation-fighting rate increases, which raise Treasury’s cost of borrowing to fund federal operations.

“On both of these counts, you’re talking about tens of billions of dollars,” said the center’s director of economic policy Shai Akabas, who believes that’s enough to accelerate the X date by several weeks.

A debt limit breach carries enormous unknown stakes because of its potential impact on financial markets, where a government default on its bonds could cause chaos, and on the broader economy, if the U.S. can’t pay for things like Social Security benefits and military salaries

Inflation could also have an impact, in part because of Treasury Inflation-Protected Securities, a type of government bond that has attracted new interest from investors in recent months because its value increases as prices rise. Though price spikes have begun to ease over the last few months, if that trend reverses it could amount to tens of billions of dollars in more debt on the books.

One of the biggest factors will be the upcoming tax-filing season. Strong revenue could push the X date out further, while numbers that trail expectations could bring it closer. Treasury had a windfall in tax payments that beat forecasts last year.

“There’s no reason why anyone should be complacent about how much time they have,” said former Congressional Budget Office Director Douglas Holtz-Eakin, now president of the American Action Forum.