Janet Yellen says a default would be an economic disaster

  • Yellen’s comments, a political deadlock over raising the debt ceiling, pushed the Treasury Department perilously close to a worst-case scenario: a potential U.S. debt default.
  • President Joe Biden will meet with four key leaders of Congress on Tuesday. The White House says it won’t negotiate on the debt ceiling, but Republicans say the meeting proves the president is coming to the table.

U.S. Treasury Secretary Janet Yellen holds a news conference in the Money Room at the Treasury Department on April 11, 2023 in Washington, DC.

Chip Somodevilla | Good pictures

WASHINGTON — Failure to raise the U.S. debt ceiling would cause „economic disaster,” Treasury Secretary Janet Yellen said Monday.

„It’s something that could create a financial mess, it would drastically reduce the level of spending, and people who get Social Security and veterans and people who count on money from the government, contractors, we won’t have enough money to pay the bills,” Yellen told CNBC’s Closing Bell: Overtime.

Yellen’s comments, a political deadlock over raising the debt ceiling, pushed the Treasury Department perilously close to a worst-case scenario: a potential U.S. debt default. This will happen if the Treasury runs out of extraordinary measures implemented earlier this year to meet its obligations after the US reaches its statutory debt ceiling of $31.4 trillion.

To avoid defaulting on the nation’s debt, Congress must vote to raise or suspend the debt ceiling before the Treasury runs out of emergency funds. But with only eight days left this month, when both the House and Senate are scheduled to convene simultaneously, time is running out to reach a deal.

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Both the Treasury and the Congressional Budget Office released new reports last week predicting the measures will run out before June 1, which is sooner than Wall Street or the White House expected. The new, earlier date was lower than expected federal tax revenue in April.

On Tuesday, Biden will hold a high-stakes meeting at the White House with four top leaders of Congress: House Speaker Kevin McCarthy, R-Calif., House Minority Leader Hakeem Jeffries, D-N.Y., Senate Majority Leader Chuck Schumer, D-N.Y., and Senate Minority Leader Mitch. McConnell, R-K.

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The White House says the meeting will not include talks on raising the debt ceiling, which Biden says Republicans would have to agree to without preconditions. So far, Republicans have refused to approve a debt ceiling hike.

Economists on both sides of the aisle agree that even the shortest default would send shock waves through stock markets and raise interest rates.

„Short-term financial markets, which are essential to the flow of credit that helps finance the economy’s day-to-day operations, are closed in the event of a default,” said Mark Zandi, chief economist at Moody’s Analytics, at a Senate hearing in March.

The looming debt ceiling crisis has forced Yellen to „compress” her trip to Japan this week. He is scheduled to attend a meeting of G-7 finance ministers and central bankers.

There, Yellen’s top priorities are „strengthening the global economy, redoubling our commitment to Ukraine as it defends itself against Russia’s barbaric war, and third, our work to improve economic resilience and security,” the Treasury Department said in a statement Friday.

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Behind the scenes, Yellen is likely to face questions from her G-7 peers about the debt ceiling debate and prospects for repaying the U.S. debt.

„If we compromise the U.S.’s credit rating and the debt repayments get even worse, I think that will have a negative impact on the use of the dollar as a reserve currency,” Yellen told CNBC.

„The dollar is considered the foundation, the safe-haven asset, in the entire global financial system. It’s reliable, and it’s the ultimate safe-haven asset, and failure to raise the debt ceiling affects the U.S. credit rating, which would be at risk.” she said. „So it’s a real concern.”

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