U.S. Treasury Secretary Janet Yellen warns that if the debt ceiling is not raised, the U.S. may declare default by June 1st. What will happen to the dollar?
According to Yellen's statement, starting June 1st, the government will not be able to continue to fulfill all its obligations if Congress does not raise or suspend the debt limit by that time. She wrote this to the Speaker of the House of Representatives, Kevin McCarthy, as well as other leaders of both parties. The economic impact of this unresolved issue could lead the United States to a recession.
The U.S. has always fulfilled its obligations, including paying interest to individuals and other countries. On January 19, 2023, the government officially ran out of money. At that time, the debt ceiling was $31.4 trillion, which had been reached. In previous instances in history, similar situations led to a delay in raising the debt ceiling due to a split between Democrats and Republicans.
However, without serious compromises from both sides, disagreements between the parties cannot be resolved. In April, Republicans in the House of Representatives proposed and adopted a 320-page bill "Limit, Save, Grow Act," which implies raising the debt limit by $1.5 trillion by the end of March 2024. According to McCarthy, the plan includes $4.5 trillion in savings through cuts.
From President Joe Biden's side, there are no restrictions on raising the debt ceiling that include any additional conditions. Yellen urged Congress to act as soon as possible. Otherwise, inaction will undermine the confidence of businesses and consumers, negatively affect the U.S. credit rating, and increase the cost of short-term borrowing.
The letter from the U. S. Treasury Secretary appeared after the House of Representatives, led by Republicans, passed a bill to raise the debt ceiling, tying it to $4.8 trillion in spending cuts. As a result, negotiations reached a deadlock. The bill has no chance of passing the Senate under Democratic control.