Yellen faces the blues as debt default threat looms

When Janet Yellen was Federal Reserve chair in 2014, she faced a grilling from Republicans about whether the federal government had a plan if the nation’s borrowing limit was breached and measures to keep paying the country’s bills were exhausted.

Ms. Yellen, appearing at a congressional hearing, outlined a dire scenario in which financial institutions might try to make payments that they could not cover, because the Treasury Department was out of money, leading to a cascade of bounced checks. She pushed back against the notion held by some Republicans that an economic meltdown could be averted, warning that there was no secret contingency plan.

“To the best of my knowledge, there is no written-down plan,” Yellen was quoted saying, adding that it was beyond her remit at the Fed. “That’s a matter that is entirely up to the Treasury.”

Fending off such a calamity is now on the shoulders of Yellen who is confronting the biggest test she has faced in her eight months as President Biden’s Treasury secretary.

 Biden chose Yellen to help steer the economy out of the pandemic downturn. But in the face of congressional dysfunction, she has been thrust into a political role, trying to convince reticent Republican lawmakers that their refusal to lift the debt cap — which limits the government’s ability to borrow money — could lead to a financial collapse.

It is not a comfortable spot for Yellen, an economist by training who is now trying to navigate the rough political waters that she tends to avoid by countering legislative gamesmanship with economic logic.

Over the past month, Ms. Yellen has reached out to Democrats and top Republican leaders, including Senator Mitch McConnell of Kentucky, the minority leader, and Representative Kevin Brady of Texas, the top Republican on the Ways and Means Committee. She has used those calls to convey the economic risks, warning that the Treasury’s ability to stave off default is limited and that failure to lift or suspend the debt cap by sometime next month would be “catastrophic.”

Yellen’s task has been complicated by the fact that while she can readily convey the economic risks of default, the debt limit has become wrapped up in a larger partisan battle over Mr. Biden’s entire agenda, including the $3.5 trillion spending bill.

Uncertainty over the debt limit has yet to spook markets, but Yellen is receiving briefings multiple times a week by career staff on the state of the nation’s finances. They are keeping her informed about the use of extraordinary measures, such as suspending investments of the Exchange Stabilization Fund and suspending the issuing of new securities for the Civil Service Retirement and Disability Fund and carefully reviewing Treasury’s cash balance.

Because corporate tax receipts are coming in stronger than expected, the debt limit might not be breached until mid-to-late October, Yellen has told lawmakers.