US risks running out of money by October 18th, Yellen warns

Treasury secretary Janet Yellen has warned the US risks running out of money by October 18th ahead of her joint congressional hearing with Federal Reserve chair Jay Powell on Tuesday.

“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.”

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The updated forecast comes ahead of her appearance in front of the Senate banking committee, during which she testified that Congress must raise the debt limit or risk a “catastrophic event for [the] economy” and a financial crisis. She also cautioned that US creditworthiness would be compromised.

Borrowing limit

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. 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 Friday deadline.

Top Fed officials have 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” and think “I’ve got to get out of things”, which he said could lead to an “extreme kind of reaction in markets”.

Federal Reserve governor Lael Brainard on Monday also urged lawmakers to act, saying Congress “needs to step up”, while Mr Powell last week described the possibility of “severe damage” if the US defaulted on its obligations.

Mr Powell, who testified alongside Ms Yellen on Tuesday, warned that elevated price pressures stemming from pandemic-related disruptions are persisting longer than anticipated.

In prepared testimony, Mr Powell acknowledged the economy was getting stronger, but warned of the risk that inflation could stay higher for longer than anticipated as the more contagious Delta coronavirus variant further gummed up 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 in prepared remarks released on Monday.

“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.”

Monetary policy

His comments come on the heels of the latest meeting on monetary policy last week, where the Fed signalled it would soon begin reducing, or “tapering”, the $120 billion-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.

Fresh projections released last week suggested more Fed officials now believe an interest rate increase could be appropriate next year, with at least three rises pencilled in by the end of 2023.

Ms Yellen added in her own remarks to lawmakers that she is “optimistic” about the “medium-term trajectory” of the economy and expects a return to full employment in 2022.

Nonetheless, she warned of continued risks posed by the Delta variant, which has damped consumer sentiment and curbed business activity.

“We are in the midst of a fragile but rapid recovery from the pandemic-induced recession,” she said. “While our economy continues to expand and recapture a substantial share of the jobs lost during 2020, significant challenges from the Delta variant continue to suppress the speed of the recovery and present substantial barriers to a vibrant economy.” – Copyright The Financial Times Limited 2021