Janet Yellen, the U.S. Treasury Secretary, recently notified Congress that the U.S. may default on its debt as early as June 1. This situation will arise if the lawmakers do not raise or suspend the nation's borrowing authority before then, and it could potentially lead to a global financial crisis. Yellen has urged congressional leaders to protect the full faith and credit of the United States by acting as soon as possible to address the $31.4 trillion limit on its legal borrowing authority. She added that it is impossible to predict with certainty the exact date when the U.S. will run out of cash.
The Congressional Budget Office has also reported a greater risk of the U.S. running out of funds in early June. Due to less-than-expected tax receipts and a faster Internal Revenue Service having processed already received returns, Treasury's extraordinary measures will be exhausted sooner than previously projected.
Yellen's department had already begun resorting to "extraordinary measures" to avoid a federal government default in January. Even so, the Treasury plans to increase its borrowing during the April to June quarter of this year, even as the federal government is close to breaching the debt limit. The U.S. plans to borrow $726 billion during the quarter, which is $449 billion more than projected in January, due to a lower beginning-of-quarter cash balance and projections of lower-than-expected income tax receipts and higher spending.
While Russia's invasion of Ukraine remains a burden on U.S. economic growth, Treasury officials say the debate over the debt ceiling poses the greatest risk to the U.S. financial position. Eric Van Nostrand, acting assistant secretary for economic policy, said that "even if Congress ultimately raises the debt limit before a default occurs, the ensuing uncertainty could raise borrowing costs and induce other financial stress that would weaken our labor market and our standing in the world."
Democrats and the White House are pushing for Congress to increase the federal debt limit. President Joe Biden wants the cap raised without negotiation, while the House Republican majority has most recently passed a bill to secure spending cuts in exchange for a debt limit increase. Biden invited the four Congressional leaders to the White House on May 9 to discuss the matter.
Yellen said last week at the Cap-to-Cap policy conference in Washington that "Congress must vote to raise or suspend the debt limit, and it should do so without conditions, and it should not wait until the last minute. I believe that is a basic responsibility of our nation’s leaders to get this done." If the U.S. government is unable to pay its bills, it could potentially become a threat to the global economy.
