Yellen Warns of Financial Stability Implications if Congress Fails to Raise Debt Ceiling

Treasury Secretary Janet Yellen recently sounded alarm bells for U.S. financial regulators, warning that if the nation’s debt ceiling isn’t addressed, there could be “financial stability implications.” Yellen has campaigned for Congress to raise the debt ceiling, and if they fail to do so, has warned that the Treasury would likely reach the nation’s borrowing limit next month.

A Bloomberg article noted that the Financial Stability Oversight Council recently discussed the potential fallout from not raising the limit. The council of regulators, including chiefs of the Federal Reserve, Securities and Exchange Commission, and the Office of the Comptroller of the Currency is responsible for monitoring the risks that could start a financial crisis.

Earlier in the month, Yellen sent a letter to Congressional leadership, noting that “waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.”

According to CNBC, many economists predict that a U.S. default could initiate a serious economic downturn, which would increase borrowing costs across the country. The current debt ceiling prevents the Treasury from issuing new bonds for government activities after a certain debt level or date is reached. The level reached $22 trillion in August 2019 and was suspended until August 2021.

“A delay that calls into question the federal government’s ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets,” Yellen said.

The newest debt limit includes Washington’s additional borrowing since the summer of 2019. In July 2021, the Congressional Budget Office estimated that the new cap could be more than $28.5 trillion.