Yellen warns delay in raising debt ceiling will slow economy

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WASHINGTON (AP) – Treasury Secretary Janet Yellen on Tuesday made an urgent appeal to Congress to increase the government’s borrowing limit, a day after Senate Republicans blocked consideration of a bill that would have done so.

If the debt limit is not raised by Oct. 18, Yellen warned, “America’s full confidence and credit would be jeopardized, and our country would likely face a financial crisis and recession. economic”. Yellen testified before the Senate Banking Committee in a hearing to brief Congress on the impact of the broad financial support programs the government adopted during the pandemic.

Yellen also said failure to raise the debt ceiling would likely raise interest rates and inflate government interest payments on the national debt.

“And ordinary Americans’ interest payments on their mortgages and on their cars and on their credit cards would increase,” she said.


The hearing also included a loud denunciation of Fed Chairman Jerome Powell by Senator Elizabeth Warren, a Democrat from Massachusetts, who said she would oppose Powell’s re-appointment for a second term. Powell’s first four-year term ends in February.

The debt limit caps the amount of money the government can borrow. Still, Congress is able to approve new borrowing that exceeds the debt limit, with a vote on increasing or suspending the separately held debt limit. In this way, the debt ceiling is raised to reflect past spending and tax decisions. The limit has been raised or suspended almost 80 times since 1960. It has been suspended three times under the Trump administration.

In a separate letter Yellen sent to congressional leaders on Tuesday, she reinforced her claim that a prolonged battle to raise the limit could put the economy at risk.

“Waiting until the last minute,” the Secretary of the Treasury wrote, “can seriously damage business and consumer confidence, increase borrowing costs for taxpayers and negatively impact credit ratings. United States for years to come ”.

Senate Republicans on the banking committee argued Democrats could use their House and Senate majority to raise the debt limit themselves, using special Senate procedures to avoid obstruction.

“You just want Republican imprints on the Democrats’ efforts to tax, spend and regulate the United States in Europe,” said Senator John Kennedy, a Republican from Louisiana.

Separately, Warren said she would oppose a second four-year term for Powell, who has yet to be reappointed by President Joe Biden. She argued that Powell weakened the financial regulations that were enacted after the 2008 financial crisis.

“Time and time again you have taken action to make our banking system less secure,” Warren said. “And that makes you a dangerous man to run the Fed, and that’s why I will oppose your re-appointment.”

Some progressive activists have pushed the Biden administration to replace Powell, because of his track record on financial deregulation and what they see as his insufficient commitment to mainstream climate change into the Fed’s regulatory policies.

When asked, Powell also said for the first time that the Fed was examining the financial transactions of former Boston Federal Reserve Chairman Eric Rosengren and former Dallas Fed Chairman Robert Kaplan to see s ‘they had broken the law. Rosengren and Kaplan both resigned on Monday.

Kaplan traded millions of dollars in stocks last year, while Rosengren also traded stocks and invested in funds that bought mortgage-backed bonds, which the Fed was also buying as part of its efforts to maintain low interest rates.

Both deals took place as the Fed cut its benchmark interest rate to near zero and unveiled a range of programs to support financial markets and the economy, including billions of dollars in bond purchases and unprecedented efforts to buy municipal and corporate bonds. Both officials could have benefited from the Fed’s actions, which likely boosted the stock market.

Powell said the transactions appeared to be “in accordance with existing rules,” which “just tells you that the problem is that the rules, practices and disclosure need to be improved and that is what we are working on.”

Still, he added that the Fed is closely monitoring trading “to make sure it complies with our rules and the law.”

Norman Eisen, a senior researcher at the Brookings Institution and former ethics adviser to President Barack Obama, said Powell’s comments suggest the Fed is looking at a range of potential regulations and laws that may have been violated, the most serious being the federal conflict of interest law, which can lead to criminal penalties.

“The idea that these senior Fed officials are actively trading is foolish, given the power, the information and the responsibility they have,” he said.

Powell was criticized Tuesday by some Republicans on the committee for the high and rising costs of gasoline, food and other goods and services. Annual inflation, according to the Fed’s preferred gauge, hit 4.2% in July, the highest in three decades.

Pennsylvania Republican Senator Pat Toomey noted that inflation extends beyond categories that have been shattered by the pandemic, such as used cars, and said it was not only of a temporary spike as suggested by Powell and some other Fed officials.

“We have to recognize that this is not going the way the Fed hoped,” Toomey said.

Powell agreed that inflationary pressures have intensified as supply chain disruptions have persisted and, in some cases, have worsened. But he argued that high inflation is still mainly due to a limited number of factors that have been made worse by the pandemic, such as hotel rooms, rental cars and airline tickets.

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AP Economics writer Martin Crutsinger contributed to this report.


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