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HomeFinanceJanet Yellen fears 'substantial financial-market distress' amid debt debate

Janet Yellen fears ‘substantial financial-market distress’ amid debt debate


U.S. Treasury Secretary Janet Yellen on Wednesday expressed concerns about how financial markets are getting hit by debt-limit angst, and she said it was “almost certain” that the federal government won’t be able to meet all of its obligations in early June if Congress doesn’t raise the ceiling for borrowing.

She added that she aimed to provide a fresh update on the debt-limit deadline “pretty soon.”

“I will plan to update Congress shortly and try to increase the level of precision,” she said, as she responded to questions about Washington’s debt-ceiling standoff during The Wall Street Journal’s CEO Council Summit.

On Monday, Yellen warned in a letter that it’s “highly likely that Treasury will no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1.” That echoed warnings that she offered last week and on May 1.

In talking about markets, Yellen said there could be pain even with a deal.

“One of the concerns I have is that even in the run-up to an agreement, when one does occur, there can be substantial financial-market distress. We’re seeing just the beginnings of it,” she said. “But if you go back to 2011, remember that U.S. Treasurys were actually downgraded. The stock market fell almost 20%.”

In August 2011, lawmakers approved an increase to the limit just hours before a potential government default. Within days, the U.S. lost its triple-A credit rating from S&P for the first time in history, with the ratings agency saying the American political system had become less stable.

U.S. stocks
SPX,
-0.73%

DJIA,
-0.77%

closed lower Wednesday as concerns about the impasse in the debt-ceiling talks appeared to undermine support for equities.

When asked Wednesday about whether the Treasury Department is taking part in market participants’ preparations for a possible missed payment, Yellen said her department is “committed to not having missed payments” and “not involved in planning for what happens if there’s a default.”

Related: How would the Fed react to a debt-ceiling breach? Here’s what’s in the central bank’s playbook

And see: A debt-ceiling deal will spark a new worry: Who will buy the deluge of Treasury bills?

When asked about potentially prioritizing certain payments if the debt limit isn’t raised, the Treasury secretary said prioritization is “not really something that’s operationally feasible.”

“I am not going to get into what exactly is possible and what is not possible, because I think the most important thing to recognize is that we must raise the debt ceiling,” she said. “There isn’t any outcome that is acceptable. We will default on some obligation, and that’s really not an acceptable state of affairs.”

House Speaker Kevin McCarthy told reporters on Wednesday that he was hopeful for progress in negotiations. “I firmly believe” a deal will be reached on the debt ceiling, he said, even as he said differences remain. He repeated a demand for the U.S. government to spend less than it did last year.

White House press secretary Karine Jean-Pierre said the latest talks between McCarthy’s deputies and President Joe Biden’s team started around noon Eastern Wednesday and were still continuing as of around 2:45 p.m.

Democrats and Republicans may end up making a deal over the holiday weekend, according to Chris Krueger, managing director at TD Cowen’s Washington Research Group.

“In terms of timing, a breakthrough today is possible but not probable,” Krueger wrote in a note on Wednesday.

“If the House holds to the 72-hour rule (legislation posted for 72 hours before a vote to give all a chance to read the legislation), the absolute drop-dead for a deal announcement to pass by June 1 is Sunday, May 28. And that would require the Senate to move with incredible speed, which is not something that institution is typically associated with.”

Many analysts have been expecting a short-term move on the debt limit that would provide a divided Washington with more to come to an agreement. Krueger indicated he thinks that’s still possible.

“All sides continue to fade a short-term hike/suspension of the debt ceiling into October, though the longer this saga continues without resolution we see the chances increasing by the hour for that short-term hike,” the Cowen analyst wrote.

Robert Schroeder contributed to this report.



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