WASHINGTON, May 16 (Reuters) – U.S. Treasury Secretary Janet Yellen warned on Tuesday that a default on the government’s debt would likely leave millions of Americans without income payments, potentially would cause a recession that would destroy many American jobs and businesses.
Yellen told a gathering of community bankers that the unprecedented economic and financial crisis will exacerbate possible disruptions to federal government operations, including air traffic control, law enforcement, border security and national defense, and telecommunications systems.
The accompanying financial crisis may increase the severity of the downturn, he said in prepared statements, adding, “It is conceivable that we will see more financial markets collapse.” – with panic around the world causing margin calls, runs and fire sales. .”
Yellen told Congress on Monday that the Treasury expects to pay the U.S. government’s bills by June 1 without raising the debt limit, increasing pressure on Republicans in Congress and the White House to achieve an agreement in the coming days.
Failure to reach an agreement would result in severe economic and financial consequences, he said.
“Our economy will suddenly find itself in an unprecedented economic and financial storm,” he said, adding that 66 million Social Security beneficiaries and millions of veterans and families in the military the most likely unpaid. “And the resulting shift in income could lead to a recession that would destroy many American jobs and businesses,” he said.
Yellen said the standoff over the federal debt limit has already pushed borrowing costs higher and increased the nation’s debt burden, and urged Congress to avoid “eleventh-hour brinkmanship ” of the debt ceiling in 2011 that led to the first ever downgrade of the US credit rating.
“Time is running out. Every day that Congress does not act, we experience more economic costs that will slow the US economy,” Yellen said in comments to the Independent Community Bankers of America.
“The US economy hangs in the balance. So do the livelihoods of millions of Americans. There is no time to waste.
US President Joe Biden will meet at 3 p.m. EDT (1900 GMT) on Tuesday with Republican House of Representatives Speaker McCarthy and three other top congressional leaders to release a plan to avoid the nation’s first default.
Yellen said the 2011 crisis — when lawmakers raised the debt limit before the government had to stop making payments — showed the serious consequences of not acting quickly.
Consumer confidence fell more than 20% as a result in the past, while the S&P 500 stock index fell 17%, and mortgage and auto loan costs rose, he said.
Allowing the US to default would damage the country’s reputation and undermine the foundation of US global economic leadership, he said.
Investors have become more reluctant to hold government debt that matures in early June, and the deadlock is increasing the overall debt burden, he said.
Yellen gave an upbeat assessment of the health of US community banks, noting that many reported higher net income in 2022 than before the pandemic, although some banks in region is under more pressure after the failure of two major banks in the region – Silicon Valley Bank and Signature Bank in March.
There have been some “aftershocks,” including the failure of First Republic Bank, he said, but he doesn’t see “any sign of a change in the fundamental health of the banking system.”
However, the Treasury remains cautious and continues to closely monitor conditions, he said, adding that the government is ready to take additional actions if necessary, including if smaller institutions see deposit run at risk of collision.
Reporting by Andrea Shalal Editing by Shri Navaratnam
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