WASHINGTON – Treasury Secretary Janet Yellen urged Congress on Tuesday to raise the government’s credit limit, a day after Senate Republicans blocked consideration of a bill that would have done so.
If the debt ceiling is not raised by October 18, Yellen warned, “The full confidence and creditworthiness of the United States would be compromised and our country would likely face a financial crisis and an economic recession.” Yellen testified before the Senate Banking Committee at a hearing to brief Congress on the impact of the government’s extensive financial assistance programs during the pandemic.
Yellen also said a failure to raise the debt ceiling would likely result in higher interest rates and increase government interest payments on the national debt.
“And the interest payments ordinary Americans would pay on their mortgages, their cars, and their credit cards would go up,” she said.
The hearing also included a sharp denunciation of Fed Chairman Jerome Powell by Senator Elizabeth Warren, a Massachusetts Democrat, who said she would oppose Powell’s reappointment for a second term. Powell’s first four-year term ends in February.
The debt limit limits the amount of money the state can borrow. Still, Congress is able to approve new borrowing that exceeds the debt limit, with a separate vote to raise or suspend the debt limit. This raises the debt ceiling to reflect previous spending and taxation decisions. The limit has been raised or suspended almost 80 times since 1960. She was suspended three times during the Trump administration.
In a separate letter Yellen sent to congressional leaders on Tuesday, she reiterated her claim that a prolonged struggle to raise the cap could jeopardize the economy.
“Waiting until the last minute,” the Treasury Secretary wrote, “can seriously damage business and consumer confidence, increase the cost of credit for taxpayers, and adversely affect the United States’ creditworthiness for years to come.”
Senate Republicans on the Banking Committee argued that Democrats could use their majorities in the House and Senate to raise the debt ceiling themselves by using special procedures in the Senate to avoid a filibuster.
“They just want Republicans fingerprinted on the Democrats’ efforts to tax, issue, and regulate the United States in Europe,” said Senator John Kennedy, a Republican from Louisiana.
Separately, Warren said she would turn down a second four-year term for Powell, who has not yet been re-nominated by President Joe Biden. She argued that Powell weakened the financial regulation that was enacted after the 2008 financial crisis.
“They have acted again and again to make our banking system less secure,” said Warren. “And that makes you a dangerous man at the helm of the Fed, and that’s why I’m going to oppose your renomination.”
Some progressive activists have urged the Biden administration to replace Powell because of its track record in deregulating financial markets and insufficient commitment to mainstreaming climate change into Fed regulatory policies.
When asked, Powell also said for the first time that the Fed is investigating financial transactions of former Boston Federal Reserve Bank President Eric Rosengren and former Dallas Fed President Robert Kaplan to see if they have broken the law. Both Rosengren and Kaplan resigned on Monday.
Kaplan traded millions of dollars in stocks last year, while Rosengren also traded stocks and invested in funds that bought mortgage-backed bonds, which the Fed also bought to keep interest rates low.
Both deals took place as the Fed cut its benchmark interest rate to near zero and unveiled a number of programs to prop up financial markets and the economy, including trillion-dollar bond purchases and unprecedented efforts to buy municipal and corporate bonds. The two officials could have benefited from the Fed’s actions, which likely boosted the stock market.
Powell said the deals “are in compliance with existing rules” which “only suggests the problem is that rules and practices and disclosure need to be improved and that is what we are working on”.
Still, he added that the Fed is scrutinizing the trade “to make sure it complies with our rules and the law.”
Norman Eisen, a senior fellow at the Brookings Institution and former ethics advisor to President Barack Obama, said Powell’s comments suggest that the Fed is reviewing a number of potential regulations and laws that may have been violated, the most serious of which is the federal conflict-interest bill, that can result in criminal penalties.
“The idea of these senior Fed officials taking action is insane given the power, information and responsibility they have,” he said.
Powell was targeted Tuesday by some Republicans on the committee for high and rising costs of gasoline, groceries and other goods and services. Annual inflation hit the Fed’s preferred rate of 4.2% in July, its highest level in three decades.
Senator Pat Toomey, Republican from Pennsylvania, noted that inflation was going beyond categories turned upside down by the pandemic, such as used cars, and claimed it wasn’t just a temporary spike, like Powell and some other Fed officials have suggested.
“We have to acknowledge that this is not turning out as the Fed hoped,” Toomey said.
Powell agreed that inflationary pressures have increased as supply chain disruptions persist and in some cases worsen. However, he argued that high inflation is still mainly driven by a limited number of factors made worse by the pandemic, such as hotel rooms, rental cars and airline tickets.
AP Economics Writer Martin Crutsinger contributed to this report.