Treasury Secretary Janet Yellen Warns of Debt Limit Crisis
Treasury Secretary Janet Yellen has warned that the US government is likely to begin taking special accounting maneuvers in mid-January to avoid breaching the debt limit. In a letter to congressional leaders, Yellen stated that the Treasury will exhaust its cash reserves by January 14-23, at which point it will resort to extraordinary measures to keep the government funded.
The Treasury’s cash reserves are expected to decrease by $54 billion on January 2, due to the redemption of securities held by a federal trust fund. However, this extra headroom is likely to be exhausted by mid-January, at which point the Treasury will need to take action to avoid breaching the debt limit.
Yellen urged lawmakers to take action to defend the “full faith and credit” of the US, warning that a debt ceiling crisis could strain financial markets and put upward pressure on borrowing costs. The Treasury’s cash balance as of December 26 was $689 billion, and strategists estimate that the department has around $320 billion in fiscal space to draw on.
The debt ceiling is a recurring challenge for financial markets, and standoffs typically send front-end interest rates lower as the Treasury reduces its sales of short-term government debt. The Treasury has used various accounting maneuvers in the past to avoid breaching the debt limit, including suspending daily investments to the Thrift Savings Plan and tapping the Exchange Stabilization Fund.
The situation is likely to be a prolonged tussle over fiscal policy, with the party in opposition typically using the need for congressional approval of raising or suspending the debt ceiling as leverage in broader negotiations over taxes and spending. The ultimate deadline for debt limit action is likely to be in July or August 2025, according to estimates from Goldman Sachs Group Inc. economist Alec Phillips.