In the days following the November midterm elections, Treasury Secretary Janet L. Yellen was optimistic that the Democrats had done better than expected and maintained control of the Senate.
But as she traveled to the Group of 20 Leaders summit in Indonesia that month, she said Republicans taking control of the House posed a new threat to the US economy.
“I always worry about the debt ceiling,” Yellen told The New York Times in an interview on her flight from New Delhi to Bali, Indonesia, in which she urged Democrats to use the time left in Washington’s grip to cancel the debt. limit beyond the 2024 election. “Any way Congress can find to do that, I’m all for it.”
Democrats did not heed Yellen’s advice. Instead, the United States has spent most of this year edging closer to default, as Republicans have refused to raise or lift the country’s $31.4 trillion borrowing limit without capping spending and rolling back parts of the agenda. of President Biden.
Now, the federal government’s cash balance has dropped below $40 billion. And on Friday, Yellen told lawmakers that the X date — the point at which the Treasury Department runs out of cash to pay all its bills on time — will arrive on June 5.
Mrs. Yellen kept her contingency plans close to the vest, but signaled this week that she was thinking about how to prepare for the worst. Speaking at a WSJ Board of CEOs event, the Treasury secretary laid out the difficult decisions she would face if the Treasury were forced to choose which projects to prioritize.
Most market watchers expect the Treasury Department to choose to make interest and principal payments to bondholders before paying other bills, but Yellen would only say that she faces “very difficult choices.”
White House officials declined to say whether any contingency plans were in the works. Earlier this year, Biden administration officials said they weren’t planning how to prioritize payments. As the US moves closer to default, the Treasury Department declined to say whether that has changed.
However, former Treasury and Federal Reserve officials said emergency plans were almost certainly in the works.
Christopher Campbell, who served as Treasury Assistant Secretary for Financial Institutions from 2017 to 2018, said that given the fast approaching X date, “one would expect” that “there would be quiet talks between the Treasury Department and the White House about how would they manage a technical default and perhaps the prioritization of payments.”
The Treasury Department developed a default manual from past debt limit impasses in 2011 and 2013. And Ms. Yellen has become quite familiar with them: during the last two significant stalemates – in 2011 and 2013 – she was a senior Federal Reserve official contemplating how the central bank would try to contain the fallout from a default.
Mrs. Yellen was briefed on the Treasury’s plans during these debates and was involved in her own contingency discussions about how to stabilize the financial system in case the United States could not pay all its bills on time.
According to the Fed transcripts, the Treasury Department did indeed plan to prioritize principal and interest payments to bondholders if date X was breached. Although Treasury Department officials were apprehensive about the idea, they expressed to Fed officials that it could be done.
Fed officials also discussed steps they could take to stabilize money markets and prevent failed Treasury auctions from leading to a default, even if the Treasury Department was successfully paying creditors. Mrs. Yellen said in 2011 and 2013 that she agreed with plans to protect the financial system.
“I hope such actions may be unnecessary after the Treasury finally declares that it intends to pay principal and interest on time and we finally issue our own set of policy statements,” Yellen said in 2011. “But if stress still mounts, I would support interventions to alleviate pressures on money market funds.”
Mrs. Yellen added that she was concerned about the vulnerability of the market’s infrastructure in the event of a default and said policymakers should think about ways to plan for a default in the future.
“Given that we may face a similar situation at some point, I think it’s important that we think about lessons learned so that we and the markets are better prepared if we face such a situation again,” Yellen said.
Eric Rosengren, who was president of the Federal Reserve Bank of Boston in 2011, said in an interview that he hoped Yellen, who is known for being rigorously prepared, would be busy considering contingency plans as she did at the Fed more than a decade ago.
“It would be irrational not to do some planning,” Rosengren said, adding that Yellen’s track record in dealing with financial stability issues makes her well positioned to be as ready as possible for the fallout of a default. “The last thing you want is to be completely unprepared and have the worst outcome.”
As the debt ceiling impasse intensified, Yellen has not been as involved in negotiations with lawmakers as some of her predecessors.
Biden has tapped Shalanda Young, his budget director, and Steven J. Ricchetti, a White House adviser, to lead negotiations with House Republicans. Mrs. Yellen did not attend the Oval Office meetings between Mr. Biden and the Republicans.
“It doesn’t look like Yellen is playing an active role in budget negotiations,” said David Wessel, a senior fellow in economics at the Brookings Institution who worked with Yellen at Brookings. “It could be that it’s not their comparative advantage, it could be that the White House wants to do it themselves, and it could be that they want to protect the Treasury’s credibility by predicting date X.”
Mrs. Yellen took on a more behind-the-scenes role, briefing the White House on the country’s cash reserves, calling business leaders and asking them to urge Republicans to raise the debt limit, and sending increasingly regular letters to Congress warning when the federal government will be unable to pay all its bills.
A White House official pointed out that Ms. Yellen has been the Biden administration’s top messenger on the debt limit on Sunday morning talk shows and that she’s been coordinating daily with Jeffrey D. Zients, the White House chief of staff, and Lael Brainard, director of the National Economic Council. , to outline the government’s strategy. Other officials attended the Oval Office meetings because the White House continues to view them as budget talks, the official added.
The Treasury secretary also cut short a recent trip to Japan for a meeting of Group of 7 finance ministers so that she could return to Washington to deal with the debt limit.
Despite Yellen’s efforts to shun the debt-limit policy, Republicans have expressed doubts about her credibility.
Members of the House Freedom Caucus wrote a letter to Speaker of the House Kevin McCarthy recently urging Republican leaders to demand that Yellen “provide full justification” of her earlier projection that the US could run out of cash on June 1. , they accused her of “manipulative timing” and suggested that her predictions should not be trusted because she was wrong about how hot inflation would get.
The letter Yellen sent on Friday set a specific deadline – June 5 – and listed the next payments the federal government is required to make and explained why the Treasury Department would be unable to cover its debts after that date.
Representative Patrick T. McHenry, a North Carolina Republican who helped lead the talks, said on Friday that there were doubts about the X date because it was offered as a break. That, he said, is not what Americans experience when they don’t have the money to pay their mortgage bills the day they’re due.
“There was some skepticism about a date range – that you can pick whatever you like,” he said. “It is not how it works.”
Republicans are also targeting some of Yellen’s most prized policy priorities in the talks, such as reversing some of the $80 billion the IRS received as part of last year’s Inflation Reduction Act.
The White House appears prepared to return $10 billion of those funds, intended to bolster the agency’s ability to detect tax fraud, in exchange for preserving other programs.
In an interview with NBC’s Meet the Press this week, Yellen lamented that Republicans were aiming for the money.
“Something that worries me a lot is that they were even in favor of removing the funding that was provided to the Internal Revenue Service to crack down on tax fraud,” she said.
Whenever the debt limit stalemate eases, Democrats are likely to come under renewed pressure to revise the laws governing the nation’s borrowing the next time they control the White House and Congress. Fearing that a fight over the debt limit would put her in the precarious position she now faces, Yellen said in 2021 that she supported abolishing the borrowing limit.
“I believe that when Congress legislates spending and implements tax policy that determines taxes, these are the crucial decisions that Congress is making,” Yellen said at a House Financial Services Committee hearing. “And if funding these spending and tax decisions requires issuing additional debt, I believe it is very destructive to put the President and myself, as Treasury Secretary, in a situation where we may not be able to pay the bills arising from these past decisions.”