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Within Treasury, the team monitors early economic warning signs when there is a risk of default


Nearly five months before the US was expected to hit the debt ceiling, a small team at the Treasury Department began alerting top officials to the early impacts already being felt in the US financial system.

The cost of insuring US debt, as measured by the price of credit default swaps, rose – a sign that investors were beginning to view US bonds and other securities as increasingly risky.

That early warning — and more over the past month as swap prices have soared — came from the Treasury Department’s Markets Room and its eponymous team of nine financial analysts, responsible for overseeing and analyzing global financial markets in order to understand policy Work to inform top Treasury Department and White House officials.

As the US rapidly approaches a possible default date in early June, senior US officials are increasingly relying on the Markets Room to monitor signs of disruption in financial markets.

“Just as a doctor wants to understand a patient’s vital signs while considering how to treat them, the Treasury Department needs to be aware of the ways in which the economy is healthy or unhealthy. And that includes understanding the market,” Deputy Treasury Secretary Wally Adeyemo said in an interview with CNN.

“So we’re spending a lot of time with them to better understand what the cost is today, to make sure we’re able to share that information with Congress to prevent us getting into a position where.” for the first time in our history we are unable to pay all our obligations on time.”

This work begins each day before dawn, when staff take turns getting up around 3:30am ET to collect data on overnight market developments and begin phoning contacts who operate in European and Asian markets.

Around 7 a.m. ET, this data and insights hit the inboxes of top policymakers at the White House and Treasury Department.

At 9 a.m. ET, before US markets open, Treasury Secretary Janet Yellen and her executive team will meet virtually with the Markets Room and other key Treasury officials to update on the state of financial markets and topics to watch for the day.

“Nearly every American is affected by what is happening around the world and in global markets, either through their 401(k) or their attempt to borrow money for their small business or home. So this team keeps us updated on what’s happening in the world every morning,” Adeyemo said.

For the past few weeks, this daily briefing has focused heavily on the aftermath of the debt ceiling standoff, from updates on Treasury bill auctions to market reactions and commentary from market analysts and economists.

We spend much of the rest of the day monitoring developments in the financial markets and responding to inquiries from senior policymakers at the Treasury Department and the White House to analyze these developments.

And at the end of the day, the Markets Room also helps policymakers digest the biggest developments in financial markets by sending out another widely read one-page memo after US markets close and before Asian markets open.

Beyond the Treasury Department, a White House spokesman said the unit’s twice-daily memos were “a valuable asset” to officials at the National Economic Council and the Council of Economic Advisers.

“These offices also rely on the Markets Room’s real-time updates — either in memos or meetings — when more regular monitoring is needed,” the spokesman said.

Officials say the Markets Room is focused on monitoring the global economy’s recovery from the pandemic-related recession, persistent inflation and global economic developments.

Albert Lee, director of the Markets Room, described the unit as an early warning system for US leaders on the global financial system.

In the early days of the coronavirus pandemic, the team were among the first to ring alarm bells within the federal government over early shocks in parts of the financial system and predictions of rate cuts by the Federal Reserve.

The team also played a pivotal role during the banking crisis earlier this year, tracking the strong stock selling and deposit drain at Silicon Valley Bank that ultimately triggered the bank’s collapse.

As the Treasury Department took action to deal with the second-biggest bank failure in US history and to prevent banking sector spillovers, senior Treasury officials relied on the Markets Room team to track feedback on their policy actions.

“It was critical for us to understand how the markets interpreted the actions we took to reassure the American people that their deposits were safe,” Adeyemo said. “We have seen signs of distress in the banking sector.”

With a week to go before the government may default on its bills, the U.S. stock market is just beginning to show signs of concern about a potential default, and Treasury Department officials say the team is focused on further stock market reactions to track the government bond market.

The stock market’s response has been relatively muted so far — especially compared to the 17% decline the S&P 500 suffered during the 2011 debt crisis. But Treasury officials say volatility in the securities market is already affecting the federal government, increasing borrowing costs.

Yields on short-term government bonds have risen sharply, and recent securities auctions are giving the federal government a higher price, which Adeyemo says recently added $80 million in costs to a recent government bond auction.

“When it comes to short-term borrowing for the US government, the cost of borrowing has already gotten more expensive,” Adeyemo said. “So if the debt crisis continues and the costs to government increase, that means the costs to the American people will also increase.”

Adeyemo declined to disclose what contingent liabilities are being prepared in the event of a US default. But when the U.S. faced a similar debt standoff in 2011, Federal Reserve and Treasury Department officials quietly prepared a plan to prioritize payments on U.S. debt and other government bills and obligations, such as Social Security and delaying payments to veterans, according to transcripts of a central bank meeting released in 2017.

“The most important thing for the American people, for our country, for our credibility, not only with our creditors but also with the American people, is to pay all of our bills on time.” That’s what our system is designed to do,” Adeyemo said. “I’ve spent almost a decade working here at the Treasury. What I can tell you is that there is no plan that would allow us to meet all of our commitments other than Congress raising the debt ceiling.”

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