Deadline looms: A file photo of Yellen speaking at an event in the United States earlier this year. A showdown over the debt ceiling would strain financial markets, experts say. — AP
Washington: US Treasury Secretary Janet Yellen says her department is likely to begin taking special accounting manoeuvers sometime in mid-January to avoid breaching the US debt limit, and urged lawmakers to take action defending the “full faith and credit” of the United States.
“On Jan 2, 2025, the new debt limit will be established at the amount of outstanding debt,” Yellen wrote in a letter last Friday to House Speaker Mike Johnson and other congressional leaders.
The Treasury will be given a short reprieve, however, because outstanding debt is scheduled to decrease by US$54bil on Jan 2, thanks to the expected redemption of securities held by a federal trust fund.
The extra headroom is likely to be exhausted by Jan 14 to 23, Yellen said. At that point, the Treasury will resort to special accounting manoeuvers to help keep the government funded.
Yellen gave no indication how long those measures, and the department’s cash reserves, are expected to last.
Wall Street has, however, begun providing estimates.
Goldman Sachs Group Inc economist Alec Phillips wrote in a Dec 21 note that the ultimate “deadline for debt limit action is likely not until July-August 2025”.
Prolonged tussle
Yellen’s letter kicks off what is likely to be a prolonged tussle over fiscal policy as the new administration led by Donald Trump takes office.
The party in opposition typically uses the need for congressional approval of raising or suspending the debt ceiling as leverage in broader negotiations over taxes and spending.
Some strategists have anticipated an easier path to an agreement to suspend or lift the cap given Republicans’ unified control of Congress.
Yet last week, Trump failed to get a debt-ceiling measure attached to the latest temporary federal spending bill when members of his own party shot down a House version that included a two-year suspension.
A showdown over the debt ceiling could strain financial markets and put upward pressure on already-elevated US borrowing costs.
Debt-ceiling brinkmanship is a recurring challenge for financial markets.
Standoffs typically send front-end interest rates lower as the Treasury reduces its sales of short-term government debt when operating under the constraint of the limit.
Cash cushion
The Treasury in October pencilled in a US$700bil cash balance for Jan 1, a figure it said was consistent with legislation passed in 2023.
As of Dec 26, the cash stockpile was US$689bil.
Beyond that, the Treasury would be able to draw on the fiscal space created by the extraordinary measures.
Calculations by strategists including those at Barclays Plc estimate that figure at around US$320bil, counting a suspension of daily investments to the Thrift Savings Plan – a retirement fund for federal employees – and the tapping of the Exchange Stabilization Fund. The Treasury has also used other steps in the past.
Historically, the most combative debt-ceiling episodes took place under a Democratic president and a Republican-controlled House, according to analysis by JPMorgan Chase & Co.
This was the case in 2011, 2013, 2015 and 2023, when agreements were reached with less than a week before spending resources were exhausted. — Bloomberg
