US to impose ‘Extraordinary Measures’ to avoid default on January 21st

Treasury Secretary Janet L. Yellen told Congress on Friday that on January 21 the Treasury Department must begin using “extraordinary measures” to prevent The United States will not pay its debts.

The warning is likely to be one of Ms. Yellen’s last moves as Treasury secretary before the Trump administration takes office at noon on Monday.

The debt ceiling – which limits the amount of money the US can borrow to fund the government and meet its financial obligations – is now the next Treasury secretary’s issue, along with the president elected Donald J. Trump and the legislators who must decide the outcome.

Mr. Trump has tapped Scott Bessent, a billionaire fund manager, to lead the Treasury Department. The act requires Senate confirmation.

In her letter, Ms. Yellen sought to remind lawmakers that the debt limit allows the government to pay for spending that has already been approved by Congress.

“The debt limit does not authorize new spending, but creates the risk that the federal government will be unable to meet existing statutory obligations that Congress and presidents of both parties have made in the past,” Ms. Yellen said in the letter. . “I respectfully urge Congress to act quickly to protect the full faith and honor of the United States.”

The debt limit was suspended until June 2023 after contentious negotiations over federal spending, work requirements for government benefits and funding for the Treasury Department. of Internal Revenue.

That suspension was scheduled to end on January 2, forcing the Treasury Department to begin using so-called extraordinary measures to allow the federal government to pay its bills. However, due to technical issues related to the federal funds rate, Ms. Yellen said in December that she expected extraordinary measures to be used between Jan. 14 and Jan. 23.

These measures are fiscal measures that can prevent the government from breaching the debt ceiling. This includes the suspension of certain types of investment in the public employee’s savings plan.

As part of those actions, Ms. Yellen said, government employees cannot use the full amount in the Pension and Disability Fund, and a “debt issuance freeze period” runs from Jan. 21 to on March 14. also suspends certain investments in the Postal Service Retirement Health Fund.

The United States borrows money to pay its bills and obligations, including funding social security programs, interest on the national debt and pay for members of the military. If the United States cannot raise the debt limit, it will not be able to pay most of these payments, including the investors who bought the government debt. Failure to pay these amounts to bondholders could cause the United States to default on its debt.

As lawmakers negotiated a spending bill last month, Mr. Trump complicated matters by pressing at the last minute for Republicans to withdraw or cancel the credit limit. For years, Republicans have used the debt limit to force Democrats to go along with painful spending cuts while they’re in power, thus putting members of their own party on the Mr. Trump’s gamble is a difficult one.

Ms. Yellen in 2021 called the debt limit “destructive” and said it should be repealed. His former predecessor as Treasury Secretary, Steven T. Mnuchin, echoed similar sentiments in 2017 when he called it a “fairly ridiculous concept” that did not limit costs.

At this week’s confirmation hearing, Mr. Bessent initially expressed skepticism about the elimination of the debt limit, and said he would study the issue and interview market participants about the merits of such a plan.

Mr. Bessent then added that he would look for ways to end the debt ceiling if Mr. Trump continued to press it and insisted that either way the United States would continue to pay its bills.

“The United States will not lose if I am confirmed,” Mr. Bessent said.

Ms. Yellen said it was unclear how long the emergency measures might be used to prevent defaults.

The Bipartisan Policy Center estimates that the real “X-date,” when the country is likely to happen, could happen this summer.