Yellen says ‘we have to default’ on something if Congress fails

Treasury Secretary Janet Yellen said that the federal government will have to renege on some payments if Congress doesn’t raise the debt limit, though no plan on how the department would proceed has yet been presented to President Joe Biden.

“If Congress fails to do that, it really impairs our credit rating. We have to default on some obligation, whether it’s Treasuries or payments to Social Security recipients,” Yellen said Friday in an interview with Bloomberg Television. “That’s something America hasn’t done since 1789. And we shouldn’t start now. So we’ve not discussed what to do.”

Yellen was pressed on whether the assumption of many market participants that the Treasury would prioritize payments of interest and principal on Treasury securities was accurate. That presumption is based on discussions between Federal Reserve and Treasury officials during the 2011 debt-limit showdown, revealed in a transcript of a Fed policymaker discussion.

“My understanding — I was at the Fed in 2011 — is that this plan was never presented to the president and never approved,” said Yellen, who was vice chair of the Fed at that time.

Asked whether she would now present that plan to prioritize Treasuries to the president, Yellen said, “we are working full time to work with Congress to raise the debt ceiling. That’s where our focus is.” 

No discussion

“We’ve not discussed what to do, if that doesn’t occur, with the president — our focus is on getting it done,” she said in the interview on the sidelines of a Group of Seven gathering of finance officials in Niigata, Japan.

Biden and congressional leaders are planning to resume discussions on the debt ceiling next week. They had been scheduled to meet Friday, but the session was postponed as Republican and Democratic staff members continue to negotiate. 

Biden and congressional Republicans have been locked in disagreement for weeks over raising the federal government’s $31.4 trillion borrowing limit. GOP leaders have demanded promises of future spending cuts before they approve a higher ceiling. Biden has insisted on a “clean” increase, with budget talks kept separate.

The Treasury chief said she hadn’t spoken with banking executives about the debt limit “within the last few weeks,” but did so when she first advised Congress in January of the potential for the Treasury to exhaust its special accounting maneuvers to avoid running out of sufficient cash as soon as early June.

Yellen said she had, however, spoken with business leaders from different sectors of the economy more recently, and plans to meet with senior bankers next week.

JPMorgan Chase & Co. has set up a “war room” looking at contingencies if the U.S. debt limit isn’t increased in time, Chief Executive Officer Jamie Dimon said in a Bloomberg Television interview Thursday.

“Wall Street executives and American businesspeople have always spoken out about their concerns about the debt ceiling,” Yellen said. “We want to hear voices of people who will be affected by this.”

The Treasury chief also reiterated her warning that a default would be “an economic and financial catastrophe.”

Yellen added that it was still unclear exactly when the Treasury would run out of funds. She told Congress earlier this month the Treasury could run out of available cash as soon as June 1.

“I will update Congress as we have available information,” Yellen said Friday. “As we get closer I may be able to provide more refined guidance.”

— With assistance from Justin Solomon, Malcolm Scott and Joe Mayes