US economy ‘hangs in the balance’ as debt limit impasse drag on

By Andrea Shalal

WASHINGTON (Reuters) – The standoff over the federal debt limit is already having dire consequences for the U.S. economy, driving borrowing costs higher and adding to the country’s debt burden, U.S. Treasury Secretary Janet Yellen is expected to say in prepared remarks on Tuesday.

Yellen will deliver the message to a group of community bankers in Washington, reminding them about the “eleventh-hour brinkmanship” over the debt ceiling in 2011 that led to the first-ever downgrade of the U.S. credit rating.

“Time is running out. Every single day that Congress does not act, we are experiencing increased economic costs that could slow down the U.S. economy,” Yellen said in remarks prepared for an event hosted by the Independent Community Bankers (NASDAQ:) of America.

“The U.S. economy hangs in the balance. The livelihoods of millions of Americans do too. There is no time to waste. Congress should address the debt limit as soon as possible.”

Yellen on Monday told Congress the Treasury expects to be able to pay the U.S. government’s bills only through June 1 without a debt limit increase, heaping pressure on Republicans in Congress and the White House to reach a deal in coming days.

U.S. President Joe Biden is due to meet at 3 pm. EDT(1900 GMT) on Tuesday with Republican House of Representatives Speaker McCarthy and the three other top congressional leaders to hash out a plan to avoid the country’s first-ever default.

Yellen said the 2011 crisis – when lawmakers raised the debt limit shortly before the government had to stop making payments – showed the serious repercussions of not acting sooner.

Consumer confidence fell by over 20% as a result then, while the stock index dropped 17%, and mortgage and auto loan costs went up, she said.

Allowing the U.S. to default would trigger an economic and financial catastrophe, jeopardizing the country’s reputation and undermining the bedrock of U.S. global economic leadership, she said.

Investors had already become more reluctant to hold government debt that matures in early June, and the deadlock was increasing the overall debt burden, she said.

Yellen gave an upbeat assessment of the health of U.S. community banks, noting that many reported higher net income in 2022 than before the pandemic, even as some regional banks were under increased pressure after the failure of two large regional banks – Silicon Valley Bank and Signature Bank (OTC:) in March.

There had been some “aftershocks”, including the failure of First Republic Bank (OTC:), she said, but she did not see “any sign of a shift in the fundamental health of the banking system.”

Still, Treasury remained vigilant and was continuing to closely monitor conditions, she said, adding that the government was ready to take further actions if needed, including if smaller institutions saw deposit runs that risked contagion.