Yellen Warns Default Deadline Just 10 Days Away

Yellen Warns Default Deadline Just 10 Days Away

Yellen said Treasury won't be able to pay all its bills by June 5.
By Yuval Rosenberg and Michael Rainey
Friday, May 26, 2023

Happy Friday! We’ve reached the long holiday weekend — but negotiators in Washington, D.C., have yet to reach a deal to raise the debt limit. Some significant disagreements remain, but Treasury Secretary Janet Yellen announced a specific new “X-date” deadline, when the U.S. will run out of cash to pay all its bills, that provides a slight extension for those negotiations.

Here’s your update. We’ll be back in your inbox on Tuesday.

Debt Limit Must Be Raised by June 5, Yellen Warns

Negotiators for President Joe Biden and House Republicans are still struggling to lock down a deal to set federal spending levels, raise the nation’s borrowing limit and avoid a potentially calamitous U.S. debt default. As the talks continue, Treasury Secretary Janet Yellen on Friday afternoon announced that the deadline for raising the debt limit will be June 5.

“Based on the most recent available data, we now estimate that Treasury will have insufficient resources to satisfy the government’s obligations if Congress has not raised or suspended the debt limit by June 5,” Yellen wrote in a letter to congressional leaders.

Yellen had previously said that the deadline would fall in early June and could be as soon as June 1, so her latest update provides negotiators with more breathing room to finalize a deal. At the same time, the letter makes it clearer than ever that the Treasury will not be able to make it to June 15, when an expected inflow of revenues could have extended the default deadline to late July or beyond.

Yellen told lawmakers that Treasury will make more than $130 billion of scheduled payments in the first two days of June, including payments to veterans and Social Security and Medicare recipients. “These payments will leave Treasury with an extremely low level of resources,” she wrote. The funds remaining are projected to fall short of what would be needed to cover an estimated $92 billion of payments and transfers due the week of June 5.

Yellen also said that the Treasury Department yesterday used an additional extraordinary measure that it has employed in the past to buy a bit more time, swapping about $2 billion of Treasury securities between the Civil Service Retirement and Disability Fund and the Federal Financing Bank. “While this measure has not been used since 2015 due to its limited size, the extremely low level of remaining resources demands that I exhaust all available extraordinary measures to avoid being unable to meet all of the government’s commitments,” she wrote.

Where negotiations stand: The two sides are still inching toward an agreement that could lift the federal borrowing limit and cap spending for two years. Defense and veterans spending reportedly would be increased to the levels Biden proposed in his 2024 budget request.

"Things are looking good. I'm very optimistic," Biden said Friday evening, adding he's hopeful they'll know by tonight whether they have a deal.

The two sides are just $70 billion apart on a spending total that would far exceed $1 trillion, Reuters reported.

A couple of sticking points are preventing negotiators from clinching a deal, though — most notably the GOP insistence on additional work requirements for food stamps, cash assistance and health care.

“Each time there is forward progress, the issues that remain become more difficult and more challenging,” Republican Rep. Patrick McHenry, one of the negotiators, told reporters on Friday, adding, “at some point this thing could come together or go the other way.”

McCarthy has insisted that any deal must include stiffer work requirements, while most Democrats are staunchly opposed to them. Asked if Republicans would be willing to drop their push for work requirements to finalize a deal, Rep. Garret Graves, another GOP negotiator, said: “Hell no. Hell no. Not a chance.”

A potential deal provision that would rescind some funding for the Internal Revenue Service and use the money for other domestic programs reportedly also remains unsettled.

Doing the math on votes: Getting an agreement isn’t enough — the two sides also have to ensure their deal has enough support to pass both chambers of Congress. Some conservative Republicans are rebelling against the compromise based on the details and rumors that have emerged so far. And House Democratic leaders reportedly warned the White House that it can’t assume that several dozen of their members will automatically back any deal that Biden cuts — especially if it includes tougher work requirements.

McCarthy on Friday dismissed conservative criticisms and concerns about holdouts derailing a deal. “You’re talking to people who don’t know what’s in the deal,” he told reporters. “I’m not concerned about anybody making any comments right now about what they think is in or not in. Whenever we come to an agreement, we’ll make sure we will first brief our entire conference.”

What’s next: While the talks continue, the House has recessed until Tuesday. McCarthy is reportedly staying in the capital for the weekend. Biden was scheduled to depart for Camp David this evening and then travel to his home in Wilmington, Delaware, Sunday.

Number of the Day: $38.8 Billion

The cash balance at the U.S. Treasury fell to about $38.8 billion at the close of business on Thursday, according to the daily Treasury statement. As The New York Times’ Linda Qiu notes, that figure represents a huge decrease from the $316 billion balance reported at the beginning of the month. (She was writing about the $49.5 billion balance reported the day before, but the analysis still holds a day later, when the balance has fallen even lower.) While it’s certainly a lot of money – about as much as the gross domestic product of Tunisia – it’s an unusually small balance for the world’s largest payment system. According to Bloomberg, it’s the lowest cash balance since 2017.

It is also, Qiu points out, less than the net worth of roughly two dozen of the world’s wealthiest individuals. For example, the world’s wealthiest person, Bernard Arnault, chief executive of the luxury products giant LVMH, is worth $189 billion. Other individuals whose net worth exceeds the Treasury’s cash balance include Tesla’s Elon Musk ($179 billion), Amazon’s Jeff Bezos ($139 billion), Microsoft’s Bill Gates ($125 billion) and Facebook’s Mark Zuckerberg ($92.3 billion).

Tweet of the Day

From Associated Press Congressional Reporter Farnoush Amiri:

“A Capitol Hill tour guide just walked past reporters staking out McCarthys office and said, ‘Over here on your right, you’ll see a nation on the brink of economic collapse.’”

Hundreds of Thousands Lose Medicaid Coverage as Post-Pandemic Purge Begins

As many as 15 million Americans could lose their Medicaid benefits in the coming months as the Covid-19 pandemic comes to an end. The process of removing beneficiaries who no longer qualify for benefits has already begun in at least 19 states, and as The New York Times’s Noah Weiland reports, hundreds of thousands of people have already lost coverage.

The number of people participating in Medicaid and the Children's Health Insurance Program soared during the pandemic, rising from about 71 million to 93 million, as temporary federal rules prevented states from removing people from the programs. States are now reviewing the beneficiaries to determine who still qualifies. As some critics of the culling effort have feared, however, a substantial number of the first wave of removals have been on procedural grounds, with people losing coverage simply because they failed to return paperwork — even though they still qualify for the benefits. Many of those removed have been children, Weiland says.

Arkansas has been particularly aggressive in reducing its Medicaid rolls, removing 73,000 of the 1.3 million people in its system in April, the first month of review. About 5,000 of those removed were dropped because their incomes rose above the upper limit for inclusion. But the majority were removed because they failed to complete the required paperwork.

Gov. Sarah Huckabee Sanders, a Republican who served in the Trump administration, said Arkansas is trying to save money and follow the rules. “We’re simply removing ineligible participants from the program to reserve resources for those who need them and follow the law,” Sanders wrote in The Wall Street Journal. At the same time, she pushed back against critics who questioned the state’s zealous efforts, accusing them of wanting “to keep people dependent on the government.”

Other states moving aggressively to reduce their Medicaid rolls include Indiana and Florida. “In Indiana, nearly 90 percent of the roughly 53,000 people who lost Medicaid in the first month of the state’s unwinding were booted on those grounds,” Weiland writes, referring to procedural issues. “In Florida, where nearly 250,000 people lost Medicaid coverage, procedural reasons were to blame for a vast majority.”

Overall, federal officials estimate that nearly 7 million of those who lose their Medicaid and CHIP benefits during the post-pandemic purge will technically still be eligible for coverage.

Inflation Stays Stubbornly High in April

The personal consumption expenditures price index — a measure of inflation closely watched by the Federal Reserve — rose 0.4% in April on a monthly basis and 4.4% on an annual basis, the Bureau of Economic Analysis announced Friday. The higher-than-expected results disappointed analysts who hoped to see a decrease or at least steadiness in the measure; instead, both readings increased from the month before.

The core PCE index, which removes volatile food and fuel prices, showed an even stronger gain on an annual basis, rising 4.7%, though the monthly reading was the same as non-core.

The same report shows that consumer spending continues to be a source of strength for the economy, rising 0.8% in April on a monthly basis — a big jump from the 0.1% increases recorded in February and March. In inflation-adjusted terms, consumer spending rose 0.5% last month. That strength, though, could be seen as a problem by Fed officials looking for signs of cooling.

Eyeing the Fed: The report probably boosted the odds that the Federal Reserve could raise interest rates again, if not at the Fed meeting next week then later this year. Many analysts were betting that the interest rate increase cycle was done.

“When I look at the data and I look at what’s happening with inflation numbers, I do think we’re going to have to tighten a bit more,” Cleveland Fed President Loretta Mester told CNBC. “Everything is on the table in June.”

Diane Swonk, chief economist at KPMG, said the numbers are moving in “the wrong direction for the Fed, adding that “a July hike is now in play.” Swonk noted that Fed officials who want to halt the interest rate hikes will have a tougher time making their argument. “Doves entering June FOMC meeting with singed wings,” she tweeted.


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