Yellen warns of broken markets, disrupted services as she ramps up debt ceiling pressure

WASHINGTON — Treasury Secretary Janet Yellen on Tuesday delivered her most dire warning yet about the debt ceiling, urging Congress to raise it immediately so the government avoids running out of cash by early June.

"A default would crack open the foundations upon which our financial system is built," Yellen warned in prepared remarks. "It is very conceivable that we'd see a number of financial markets break – with worldwide panic triggering margin calls, runs and fire sales."

Yellen, speaking at the Independent Community Bankers of America Capital Summit, said the White House Council of Economic Advisers found that a default could lead to an economic downturn as bad as the Great Recession, with 8 million Americans losing jobs and the stock market's value falling by about 45%.

She also noted a Moody's Analytics report which found similar numbers with more than 7 million Americans out of work and $10 trillion in household wealth evaporated. Yellen also warned that a debt ceiling breach could affect essential government services.

"If that sounds catastrophic – that's because it is," Yellen said. "Now, this crisis is entirely preventable. The solution is simple."

Yellen's words came hours before President Joe Biden is scheduled to meet with House Speaker Kevin McCarthy and other top congressional leaders to try to knock out a deal before Biden leaves for the Group of Seven Summit in Japan. Staff from both sides have been working daily since the leaders met last week to try to come to a deal before June, when the federal government could run out of money. The leaders left the previous meeting with little progress to show.

Yellen reaffirmed the so-called X-date of June 1 in her remarks and pleaded with Congress to act.

"Our current best estimate underscores the urgency of this moment: it is essential that Congress act as soon as possible."

Lifting the debt ceiling is necessary for the government to cover spending commitments already approved by Congress and the president and prevent default. Doing so does not authorize new spending. But House Republicans have said they will not lift the limit if Biden and lawmakers do not agree to future spending cuts.

The Treasury secretary said a default would "generate an economic and financial catastrophe" and wipe out economic gains Americans have made since the coronavirus pandemic. Not doing so would lead to "an unprecedented economic and financial storm" that would immediately stop government payments to 66 million Social Security beneficiaries, millions of veterans and military families.

"A default could cause widespread suffering as Americans lose the income that they need to get by," Yellen said. "And the resulting income shock could lead to a recession that destroys many American jobs and businesses."

Yellen also noted the ways a default would disrupt everyday life: air traffic controllers, law enforcement, border security, food safety, communications systems and national security are all at risk when the government stops paying federal employees and contractors.

"We are already seeing the impacts of brinksmanship: investors have become more reluctant to hold government debt that matures in early June," she said. "And the impasse has already increased the debt burden to American taxpayers."