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    How ‘Extraordinary Measures’ Can Postpone a Debt Limit Disaster

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    Treasury Secretary Janet L. Yellen will soon need to use accounting maneuvers to keep the United States from defaulting on its debt.WASHINGTON — The United States is expected to hit a cap on how much money it can borrow this week, a development that will result in the Treasury Department employing what are known as “extraordinary measures” to ensure that the federal government has enough money to pay its bills.The United States runs a budget deficit, which means it does not take in enough money through taxes and other revenue to fund its operations. As a result, the country sells Treasury debt to finance its operations — using borrowed money to fund military salaries, retiree benefits and interest payments to bondholders who own U.S. debt.But Congress limits the amount of money the federal government can borrow — what’s known as the “debt limit” — and the United States is expected to hit the current cap of $31.4 trillion on Thursday.As a result, Treasury Secretary Janet L. Yellen told Congress last week that the administration would try to keep the country under that debt cap and able to finance its operations as long as possible by using “extraordinary measures.”While the term suggests that such tools are intended to be used on rare occasions, Treasury secretaries from both parties have recently had to rely such accounting maneuvers to allow the government to continue its operations for limited periods.What are extraordinary measures?When the country comes close to — or hits — the statutory debt limit, the Treasury secretary can find ways to shift money around government accounts to remain under the borrowing cap, essentially buying time for Congress to raise the cap.That includes seeking out ways to reduce what counts against the debt limit, such as suspending certain types of investments in savings plans for government workers and health plans for retired postal workers. The Treasury can also temporarily move money between government agencies and departments to make payments as they come due. And it can suspend the daily reinvestment of securities held by the Treasury’s Exchange Stabilization Fund, a bucket of money that can buy and sell currencies and provide financing to foreign governments.After the debt limit impasse ends, programs whose investments were suspended are supposed to be “made whole.”In the event that the statutory debt limit is breached, the Treasury Department broadly looks for ways to reduce different types of debt that the government incurs so that it can continue to pay its obligations on time. This allows the Treasury Department to reinforce its cash reserves without having to issue new debt.Ms. Yellen said last week that she first plans to take two steps to buy lawmakers more time to reach a debt limit deal. She will redeem existing investments and suspend new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. And she will suspend reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan.Treasury Secretary Janet L. Yellen says she expects to have to start deploying some of the tools as soon as Thursday, when the $31.4 trillion borrowing cap is expected to be technically breached.Adam Perez for The New York TimesWhat happens if a standoff persists?If the initial steps that Ms. Yellen has outlined are not enough, there are other tools at her disposal.A 2012 Government Accountability Office report said that to manage debt when the borrowing cap is in limbo, the Treasury secretary could suspend investments in the Exchange Stabilization Fund. Typically, funds that are not being used for those purposes are invested in Treasury securities that are subject to the debt limit, so halting these investments creates some additional wiggle room.The Treasury Department also oversees the Federal Financing Bank, which can issue up to $15 billion of its own debt that is not subject to the debt limit. In a debt ceiling emergency, Ms. Yellen could exchange that debt for other debt that does count against the limit.Another option would be for the Treasury Department to suspend new issuance of State and Local Government Series securities. The Government Accountability Office said such a move would reduce “uncertainty over future increases in debt subject to the limit.”Are there risks to using extraordinary measures?Delaying the debt limit does not come without costs.Suspending certain investments can cost the federal government money in the longer term, and running the country on fumes can lead to market volatility.“Debt limit impasses have also repeatedly disrupted implementation of Treasury’s cash management policy — with knock-on effects for money markets,” Joshua Frost, assistant Treasury secretary for financial markets, explained in a speech in December.Mr. Frost added that the Treasury Department usually has a daily cash balance of $600 billion to $700 billion, but that during the 2021 debt limit standoff, there were days when it grew painfully close to zero. Such situations can force the Treasury Department to undertake risky moves such as issuing same-day cash management bills or conducting buybacks.“There were several instances when we didn’t have sufficient cash on hand to meet even our next-day obligations,” Mr. Frost, who spoke at the Federal Reserve Bank of New York’s Annual Primary Dealers Meeting, said. “During the course of that impasse, Secretary Yellen wrote eight separate letters to Congress regarding the importance of acting to address the debt limit.”How long do extraordinary measures last?The timeline for using these measures is uncertain.Christopher Campbell, who served as assistant Treasury secretary for financial institutions from 2017 to 2018, said that because there so many variables in play, it is often difficult to give a precise estimate of the grace period between when the debt limit is breached and when the United States potentially defaults on its obligations.“It depends on receipts, it depends on how the economy is doing, it depends on how companies are doing,” Mr. Campbell said. “There are some shell games and accounting games that go into it.”The Bipartisan Policy Center said in a 2021 report that the timing of when the debt limit hits plays a role in how long extraordinary measures might last. Big government expenses in February could mean that X-date, when the government runs out of cash, comes sooner than anticipated, while robust April tax receipts could buy more time for extraordinary measures to keep the lights on.In her letter to Congress, Ms. Yellen said ominously that “Treasury is not currently able to provide an estimate of how long extraordinary measures will enable us to continue to pay the government’s obligations.” She then surmised that it is unlikely that cash and extraordinary measures will be exhausted before early June. More

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    As Debt Ceiling Threat Looms, Wall Street and Washington Have Only Rough Plans

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    A default would most likely rattle markets and carry big risks, no matter how the Federal Reserve and Treasury try to curb the fallout.With days to go before the United States bumps up against a technical limit on how much debt it can issue, Wall Street analysts and political prognosticators are warning that a perennial source of partisan brinkmanship could finally tip into outright catastrophe in 2023.Big investors and bank economists are using financial models to predict when the United States, which borrows money to pay its existing bills, will run out of cash. They are assessing what it could mean if the government is unable to pay some of its bondholders and the country defaults on its debt. And they are gaming out how to both minimize risks and make the most of any opportunities to profit that might be hiding in the chaos.The need to start planning for a potential debt limit breach became more urgent last week, when Treasury Secretary Janet L. Yellen told Congress that the United States would hit its borrowing cap on Thursday. At that point, Treasury will begin using “extraordinary measures” to try to stay under the cap for as long as possible — but those options could be exhausted as soon as June.Congress places a limit on the amount of debt the country can issue, with a simple majority in the House and Senate required to lift it. That cap, currently $31.4 trillion, needs to be adjusted to allow the United States to borrow to pay for obligations it has already committed to, such as funding for social safety net programs, interest on the national debt and salaries for troops.Wrangling over lifting the borrowing cap has become a fixture, and this year is shaping up to be particularly complicated. Republicans hold the House by a slim majority, and a small but vocal faction of the party has won changes to the rules that govern legislative debate. They have made clear that they want deep spending cuts in exchange for raising the debt limit, and their empowerment could make this round of negotiations more likely to end in disaster.Bank of America analysts wrote in a note to clients this week that a default in late summer or early fall is “likely,” while Goldman Sachs called the possibility that the government would not be able to make good on its bills a “greater risk” than at any time since 2011. When the nation approached the brink in that episode, its credit rating was downgraded and wild market gyrations helped to force lawmakers to blink.A debt default would most likely rattle markets and carry big risks.Andrew Kelly/ReutersIn Washington, the Federal Reserve and Treasury are not publicly speaking about what they could do if an outright default were to happen this time, in part because the mere suggestion they will bail out warring politicians could leave lawmakers with less of an incentive to reach a deal. But they have a series of options — albeit bad ones — for mitigating the disaster if political impasse takes the nation up to or over the brink of default.It is tricky to guess exactly how financial markets will react, both because the timing of any default is uncertain and because many investors are waiting and watching to see what happens in Washington.But former government officials and cautious Wall Street observers warn that the effects could be significant. Markets have grown bigger and more complex since 2011, and an outright default could lead to mass selling, which would impair financial functioning. While the government has done contingency planning for a default, former officials say there is no foolproof option for staving off a disaster.Understand the U.S. Debt CeilingCard 1 of 4What is the debt ceiling? More

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    U.S. Will Hit Debt Limit on Thursday, Yellen Tells Congress

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    The Treasury Department expects to begin taking “extraordinary measures” to continue paying the government’s obligations before what is expected to be a big fight to raise the borrowing cap.WASHINGTON — Treasury Secretary Janet L. Yellen warned on Friday that she would have to begin employing “extraordinary measures” on Thursday to continue paying the nation’s bills if lawmakers did not act to raise the statutory debt limit and that her powers to delay a default could be exhausted by early June.Ms. Yellen’s letter to Congress was the first sign that resistance by House Republicans to lifting the borrowing cap could put the U.S. economy at risk and signals the beginning of an intense fight in Washington this year over spending and deficits.“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability,” Ms. Yellen wrote.Ms. Yellen said on Friday that considerable uncertainty surrounded how long she could use measures to delay a default. She said she would begin suspending new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund and suspending reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan this month to avoid breaching the debt limit.The letter is the beginning of what is expected to be a protracted and potentially damaging economic fight. Republicans, who assumed control of the House last week, have insisted that any increase to the debt limit be accompanied by significant spending curbs, most likely including cuts to both the military and domestic issues.Speaker Kevin McCarthy has cited reducing the national debt — which topped $31 trillion last year and has increased during both Republican and Democratic administrations, including about a 40 percent increase under former President Donald J. Trump — as a central focus of his party’s agenda.“The American people are the ones that’s demanding the cut in spending,” Representative Jason Smith, a Missouri Republican and the chairman of the powerful House Ways and Means Committee, said Friday on Fox News. “We have to have fiscal reforms moving forward. We cannot just give an unlimited credit card.”Understand the U.S. Debt CeilingCard 1 of 4What is the debt ceiling? More

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    Yellen Is First Female Treasury Secretary With Signature on U.S. Dollar

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    Two women — the first female Treasury secretary and the first Native American to serve as U.S. treasurer — now have their signatures on America’s currency.WASHINGTON — During a recent appearance on “The Late Show With Stephen Colbert,” Treasury Secretary Janet L. Yellen faced an awkward question: After nearly two years in the job, why was the signature of her predecessor, Steven T. Mnuchin, still scrawled across the nation’s currency?The answer, she explained, was a quirk of currency design that required a new treasurer of the United States to be in place before the money could be remade with both of their signatures.That finally happened on Thursday when the first bank notes bearing the name of America’s first female Treasury secretary were unveiled. The occasion was another crack in the glass ceiling for Ms. Yellen and the notoriously male-dominated field of economics.The bills will also bear the name of Marilynn Malerba, the first Native American to hold the role of treasurer. The first $1 and $5 notes with their signatures will enter circulation next month.Ms. Yellen, who has previously served as the Federal Reserve chair and the head of the White House’s Council of Economic Advisers, said on Thursday that having her name on the currency was more than a personal career achievement.“Today is not about me or a new signature on our currency,” Ms. Yellen said during a visit to the Bureau of Engraving and Printing in Fort Worth, Texas. “It’s about our collective work to create a stronger and more inclusive economy.”Inflation F.A.Q.Card 1 of 5What is inflation? More

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    David Lipton, Economic Diplomat, Will Step Down From Treasury

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    Mr. Lipton, who served in senior roles in the Clinton and Obama administrations and at the I.M.F., is retiring.WASHINGTON — David A. Lipton, a longtime figure in the field of international economics, is stepping down on Wednesday from his job as international affairs counselor to Treasury Secretary Janet L. Yellen, according to two Treasury Department officials familiar with his plans.Mr. Lipton, one of Ms. Yellen’s closest aides, is departing at a critical moment for the global economy. He has become a key negotiator in some of Ms. Yellen’s biggest policy issues. He was deeply involved in international discussions about a global minimum tax last year and has been at the center of the talks among the Group of 7 nations to impose a cap on the price of Russian oil.An economist by training with a doctoral degree from Harvard, Mr. Lipton, 69, has held senior economic policymaking positions in the Clinton, Obama and Biden administrations. He was also a top official at the International Monetary Fund, where he served as the deputy managing director.Last year, Ms. Yellen recruited Mr. Lipton to return to the federal government to help steer the Treasury Department’s international portfolio while President Biden’s nominees to lead the international affairs division were awaiting Senate confirmation.In a statement, Ms. Yellen described Mr. Lipton as one of her closest advisers and lauded his career.The Biden PresidencyHere’s where the president stands after the midterm elections.Beating the Odds: President Biden had the best midterms of any president in 20 years, but he still faces the sobering reality of a Republican-controlled House.2024 Questions: Mr. Biden feels buoyant after the better-than-expected midterms, but as he turns 80, he confronts a decision on whether to run again that has some Democrats uncomfortable.The ‘Trump Project’: With Donald J. Trump’s announcement that he is officially running for president again, Mr. Biden and his advisers are planning to go on the offensive.Legislative Agenda: The Times analyzed every detail of Mr. Biden’s major legislative victories and his foiled ambitions. Here’s what we found.“He will be irreplaceable for the department, but I feel incredibly fortunate to have had his counsel in my first two years,” Ms. Yellen said. “During that time, David has helped shape our international agenda across a wide set of challenges — from the recovery from the pandemic to our response to Russia’s war against Ukraine.”Mr. Lipton first met Ms. Yellen while a graduate student at Harvard, where he took her introductory course in macroeconomics. Lawrence H. Summers, who would serve as Treasury secretary during the Clinton administration, was also in the class, and he and Mr. Lipton became friends.After graduating from Harvard with a Ph.D. in economics in 1982, Mr. Lipton joined the I.M.F., where he worked for eight years on assignments that involved stabilizing the economies of poor countries.In 1993, after a stint working with the economist Jeffrey D. Sachs advising Russia, Poland and Slovenia on their transitions to capitalism, Mr. Lipton joined the Clinton administration’s Treasury Department. He was recruited by Mr. Summers, who was then the deputy Treasury secretary under Robert E. Rubin. He initially focused on Eastern Europe and the former Soviet Union before turning his attention to easing turmoil stemming from the Asian financial crisis in 1997.While President George W. Bush was in office, Mr. Lipton worked at Citigroup and at the hedge fund Moore Capital Management. He joined the Obama administration as an economic adviser. In 2011, Christine Lagarde named him her top deputy at the I.M.F. when the fund was spending billions of dollars to prop up Greece’s economy and as the economic tension between the United States and China was intensifying.Mr. Lipton’s second term at the monetary fund was cut short in 2020 when Kristalina Georgieva reshuffled its senior leadership. His position at the fund, which is usually decided by the United States, was filled by Geoffrey Okamoto, a former Trump administration official.A longtime proponent of the benefits of a global economy and multilateralism, Ms. Yellen persuaded Mr. Lipton to join her team as the Biden administration sought to mend international relationships that had been frayed during the Trump era.“David Lipton has been an insufficiently sung hero of the international financial system for the last 30 years,” Mr. Summers said in a text message. “His quiet strength and wisdom both prevented and resolved numerous crises.”Mr. Lipton, who grew up in Wayland, Mass., was a star wrestler in high school, serving as a co-captain for two years. At Harvard, he and Mr. Summers bonded over squash and economics.During remarks introducing Mr. Lipton at the Peterson Institute for International Economics in 2016, Mr. Summers described his former classmate as an economic “fireman in chief” who maintained a “keep hope alive” attitude when economic diplomacy got tough.Known for a dry wit that belies his earnest demeanor, Mr. Lipton expressed appreciation for the high praise but recalled that when he met Mr. Summers on the first day of school he initially had his doubts.“After talking to Larry for about 15 minutes, my reaction was, ‘If they’re all like that, I’m really in trouble,’” Mr. Lipton joked. More

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    Could a Market Blowout Like the UK’s Happen in the US?

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    Federal Reserve and White House officials spent last week quizzing investors and economists about the risks of a British-style meltdown at home.WASHINGTON — Federal Reserve researchers and officials quizzed experts from Wall Street and around the world last week about a pressing question: Could a market meltdown like the one that happened in Britain late last month occur here?The answer they got back, according to four people at separate institutions who were in such conversations and who spoke on the condition of anonymity to describe private meetings, was that it probably could — though a crash does not appear to be imminent. As the Biden administration did its own research into the potential for a meltdown, other market participants relayed the same message: The risk of a financial crisis has grown as central banks have sharply raised interest rates.The Bank of England had to swoop in to buy bonds and soothe markets after the British government released a fiscal spending plan that would have stimulated an economy already struggling with punishing inflation, one that included little detail on how it would be paid for. Markets lurched, and pension funds using a common investment strategy found themselves scrambling to adjust, prompting the central bank’s intervention.While the shock was British-specific, the violent reaction has caused economists around the world to wonder if the situation was a canary in a coal mine as signs of financial stress surface around the globe.Officials at the Fed, Treasury and White House are among those trying to figure out whether the United States could experience its own market-shuddering meltdown, one that could prove costly for households while complicating America’s battle against rapid inflation.Administration officials remain confident that the U.S. financial system is unlikely to see such a shock and is strong enough to withstand one if it comes. But both they and the Fed are keeping close tabs on what is happening at a moment when conditions feel abnormally fragile.Markets have been choppy for months in the United States and globally as central banks — including the Fed — rapidly raise interest rates to bring inflation under control. That has caused abnormally large price moves in currencies and other assets because their values hinge partly on the level of interest rates and on international rate differences. Stocks have been swinging. It can be hard to quickly find a buyer for U.S. government bonds, although the market is not breaking down. And in corners of finance that involve more complicated investment structures, there’s concern that volatility could trigger a dangerous chain reaction.“In the market, there is a lot of worry, and everyone is saying it feels like something is about to break,” said Roberto Perli, an economist at Piper Sandler who used to work at the Fed and who was not part of the conversations last week. He added that it made sense that officials were checking up on the situation.President Biden at an event promoting the Inflation Reduction Act in California last week.T.J. Kirkpatrick for The New York TimesPresident Biden has repeatedly convened his top economic aides in recent weeks to discuss market flare-ups, like the one that roiled Britain.Fed officials and staff members have met with investors and economists both during normal outreach and on the sidelines of the World Bank and International Monetary Fund annual meetings last week in Washington.Fed researchers asked about three big possibilities during the meetings. They wanted to know whether there could be a trade or an investment class in the United States similar to British pension funds that could pose a significant and underappreciated threat.They also focused on whether problems overseas could spill back over to the United States financial system. For instance, Japan is one of the biggest buyers of U.S. debt. But Japan’s currency is rapidly falling in value as the country holds its interest rates low, unlike other central banks. If that turmoil caused Japan to reverse course and stop buying or even sell U.S. Treasurys — something that it has signaled little appetite for, but that some on Wall Street see as a risk — it could have ramifications for U.S. debt markets.The final threat they asked about focused on whether today’s lack of easy trading in the Treasury market could turn into a more serious problem that requires the Fed to swoop in to restore normal functioning..css-1v2n82w{max-width:600px;width:calc(100% – 40px);margin-top:20px;margin-bottom:25px;height:auto;margin-left:auto;margin-right:auto;font-family:nyt-franklin;color:var(–color-content-secondary,#363636);}@media only screen and (max-width:480px){.css-1v2n82w{margin-left:20px;margin-right:20px;}}@media only screen and (min-width:1024px){.css-1v2n82w{width:600px;}}.css-161d8zr{width:40px;margin-bottom:18px;text-align:left;margin-left:0;color:var(–color-content-primary,#121212);border:1px solid var(–color-content-primary,#121212);}@media only screen and (max-width:480px){.css-161d8zr{width:30px;margin-bottom:15px;}}.css-tjtq43{line-height:25px;}@media only screen and (max-width:480px){.css-tjtq43{line-height:24px;}}.css-x1k33h{font-family:nyt-cheltenham;font-size:19px;font-weight:700;line-height:25px;}.css-1hvpcve{font-size:17px;font-weight:300;line-height:25px;}.css-1hvpcve em{font-style:italic;}.css-1hvpcve strong{font-weight:bold;}.css-1hvpcve a{font-weight:500;color:var(–color-content-secondary,#363636);}.css-1c013uz{margin-top:18px;margin-bottom:22px;}@media only screen and (max-width:480px){.css-1c013uz{font-size:14px;margin-top:15px;margin-bottom:20px;}}.css-1c013uz a{color:var(–color-signal-editorial,#326891);-webkit-text-decoration:underline;text-decoration:underline;font-weight:500;font-size:16px;}@media only screen and (max-width:480px){.css-1c013uz a{font-size:13px;}}.css-1c013uz a:hover{-webkit-text-decoration:none;text-decoration:none;}What we consider before using anonymous sources. Do the sources know the information? What’s their motivation for telling us? Have they proved reliable in the past? Can we corroborate the information? Even with these questions satisfied, The Times uses anonymous sources as a last resort. The reporter and at least one editor know the identity of the source.Learn more about our process.None of those areas appear to be at immediate risk of snapping, analysts told officials. The pension system in the United States is different from that in Britain, and the government debt market may be choppy, but it is still functioning.Yet they also voiced reasons for concern: It is impossible to know what might break until something does. Markets are large and intertwined, and comprehensive data is hard to come by. Given how much central bank policy has shifted around the world in recent months, something could easily go wrong.There is a good reason for officials to fret about that possibility: A market meltdown now would be especially problematic.A New York City market. The Fed is rapidly raising interest rates to bring inflation under control, but a financial crash could force it to shift that plan.Elias Williams for The New York TimesA financial disaster could force the Fed to deviate from its plan to control the fastest inflation in four decades, which includes raising rates rapidly and allowing its bond portfolio to shrink. Officials have in the past bought large sums of Treasury bonds in order to restore stability to flailing markets — essentially the opposite of their policy today.Central bankers would most likely try to draw a distinction between bond buying meant to keep the market functioning and monetary policy, but that could be hard to communicate.The White House, too, has reasons to worry. Mr. Biden was scarred by his experience as vice president throughout the Great Recession, during which a financial meltdown brought on the worst downturn since the 1930s, throwing millions out of work and consuming the Obama administration’s policy agenda for years of a painstakingly slow recovery.Mr. Biden has pressed his team to estimate the likelihood that the United States could experience another 2008-style shock on Wall Street. Treasury Secretary Janet L. Yellen and her deputies have been closely monitoring developments in the market for U.S. government debt and searching for any signs of British-style stress.While administration officials noted that trading has become more difficult in the market for Treasury bonds, they also pointed out that it was otherwise functioning well. Multiple officials said this week that they expected the Fed would step in to buy bonds — as the Bank of England did — in an emergency.Other administration officials came away from their meetings in Washington last week with increased worries about financial crises sprouting in so-called emerging markets, like parts of Africa, Asia and South America, where food and energy prices have soared and where the Fed’s steady march of interest rate increases has forced governments to raise their own borrowing costs. Such crises could spread worldwide and rebound on wealthier countries like the United States.Yet administration officials say the American economy remains strong enough to endure any such shocks, buoyed by still-rapid job growth and relatively low household debt.“This is a challenging global economic moment where stability is hard to find,” said Michael Pyle, Mr. Biden’s deputy national security adviser for international economic affairs, “but the U.S. has momentum and resilience behind its economic recovery, and a trajectory that puts the U.S. in a strong position to weather these global challenges.”And there is no guarantee that something will blow up. A senior Treasury official said this week that financial risks had risen with high inflation and rising interest rates, but that a variety of data the department tracked continued to show strength in American businesses, households and financial institutions.For now, markets for short-term borrowing, which are crucial to the functioning of finance overall, look healthy and fairly normal, said Joseph Abate, a managing director at Barclays. And officials are working on safeguards to stem the fallout if a disaster should come. The Financial Stability Oversight Council, which Ms. Yellen leads, discussed the issues at its most recent meeting this month, hearing staff presentations on U.S. financial vulnerabilities.The Treasury Borrowing Advisory Committee, an advisory group of market participants, has been asked in its latest questionnaire about a possible Treasury program to buy back government debt. Some investors have taken that as a signal that they are worried about a possible problem and may want to be able to improve market functioning, especially in light of their comments and outreach.“We are worried about a loss of adequate liquidity in the market,” Ms. Yellen said last week while answering questions after a speech in Washington.And the Fed already has outstanding tools that can help to stabilize markets. Those include swap lines that can funnel dollars to banks that need it overseas, and that have been used by Switzerland and the European Central Bank in recent weeks.Mr. Abate at Barclays said the Securities and Exchange Commission, Treasury and Fed seemed to be “on top of” the situation.“It’s clear in the marketplace that liquidity is a concern,” he said. “The regulators are moving to address that.” More