US Treasury Secretary Janet Yellen issued a warning on Tuesday, emphasizing that a failure by Congress to raise the government’s debt ceiling would result in an “economic catastrophe” with lasting impacts on interest rates. Yellen, speaking at an event in Washington, stressed that a default could lead to job losses and increased household payments on mortgages, auto loans, and credit cards.
In prepared remarks for the Sacramento Metropolitan Chamber of Commerce, Yellen described it as a “basic responsibility” for Congress to raise or suspend the $31.4 trillion borrowing cap. She cautioned that a default would jeopardize the economic progress achieved since the COVID-19 pandemic, creating long-term consequences.
“A default on our debt would produce an economic and financial catastrophe,” Yellen stated. “A default would raise the cost of borrowing into perpetuity. Future investments would become substantially more costly.”
Yellen highlighted the urgency of Congress taking action, warning that without an increase in the debt ceiling, US businesses would face challenges in credit markets, and the government might struggle to make essential payments to military families and Social Security beneficiaries.
“Congress must vote to raise or suspend the debt limit. It should do so without conditions. And it should not wait until the last minute,” urged Yellen.
In January, Yellen informed lawmakers that the government could only meet its financial obligations through early June without an increase in the debt limit. Unlike most other developed countries, the US imposes a strict limit on its borrowing capacity, requiring lawmakers to periodically raise the debt ceiling.
Kevin McCarthy, leader of the Republican-controlled House of Representatives, proposed a plan last week involving $4.5 trillion in spending cuts paired with a $1.5 trillion increase in the debt cap. The White House, however, rejects linking these two issues, and the Democratic-controlled Senate is likely to oppose the proposal.
Growing concerns in financial markets about the standoff have led to the cost of insuring exposure to US debt reaching its highest level in a decade, with analysts highlighting the escalating risk of default.
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