Treasury Secretary Warns U.S. Default on Debt Will Trigger Interest Rate Rise, Recession

Treasury Secretary Janet Yellen warned Tuesday that if the debt limit isn't raised by October 18, the United States would default on its debt, and trigger a rise in interest rates and an economic recession.

If the U.S. defaulted on its debt, Yellen said, "the full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession."

In addition to a recession, Yellen added that failing to raise the debt ceiling would likely raise interest rates for both U.S. citizens and the government's own interest payments on the national debt.

"The interest payments of ordinary Americans on their mortgages and on their cars and on their credit cards would go up," she said.

For more reporting from the Associated Press, see below.

Yellen testified before the Senate Banking Committee at a hearing to update Congress on the impact of the vast financial support programs the government enacted after the viral pandemic paralyzed the economy 18 months ago.

Federal Reserve Chair Jerome Powell, who also spoke to the committee, warned that it was "essential" to raise the debt limit and that the consequences of not doing so "could be severe."

The debt limit caps the amount of money the government can borrow and must be raised after Congress votes to spend enough money to exceed the debt. The limit has been raised or suspended nearly 80 times since 1960. It was suspended three times during the Trump administration.

In a separate letter Yellen sent to congressional leaders on Tuesday, she reinforced her assertion that a prolonged battle over raising the limit could imperil the economy.

"Waiting until the last minute," the Treasury secretary wrote, "can cause serious harm to business and consumer confidence, raise borrowing costs for taxpayers, and negatively impact the credit rating of the United States for years to come."

Senate Republicans on the Banking Committee argued that Democrats could use their majorities in the House and Senate to increase the debt limit on their own, using special procedures in the Senate to avoid a filibuster.

"You just want Republican fingerprints on the Democrats' efforts to tax, spend and regulate the United States into Europe," said Senator John Kennedy, a Republican from Louisiana.

Separately, Senator Elizabeth Warren, a Democrat from Massachusetts, said she would oppose a second four-year term for Powell as chair of the Fed, if he is offered it by President Joe Biden, because, she argued, Powell has acted to weaken financial regulations that were enacted after the 2008 financial crisis.

"Over and over, you have acted to make our banking system less safe," Warren said. "And that makes you a dangerous man to head up the Fed, and that's why I will oppose your re-nomination."

Powell's current term ends in February. Some progressive activists have pushed the Biden administration to replace Powell, because of his record on financial deregulation and what they see as his insufficient commitment to issues like climate change in the Fed's regulatory policies.

Powell came under fire Tuesday from some Republicans on the committee over high and growing costs for gasoline, food and other goods and services. Annual inflation, according to the Fed's preferred gauge, reached 4.2 percent in July, the highest in three decades.

Senator Pat Toomey, Republican from Pennsylvania, noted that inflation is broadening beyond categories that were upended by the pandemic, such as used cars, and asserted that it has not been just a temporary spike as Powell and some other Fed officials have suggested.

"We need to acknowledge that this is not playing out the way the Fed has hoped," Toomey said.

Powell agreed that inflation pressures have intensified as supply chain disruptions have persisted and in some cases worsened. But he argued that high inflation is still being driven mainly by a limited number of factors that were worsened by the pandemic, such as hotel rooms, rental cars, and airplane tickets.