U.S. Treasury Secretary Janet Yellen announced that the federal government will hit its statutory borrowing limit on Tuesday, prompting the use of “extraordinary measures” to avoid a potential default. This move comes just days before the Biden administration hands over control to President-elect Donald Trump and his incoming team.
In a letter addressed to congressional leaders on Friday, Yellen stated that extraordinary measures would commence on January 21. These measures are intended to temporarily free up borrowing capacity under the current $36.1 trillion debt ceiling, which the Treasury reported had reached $36.08 trillion as of Thursday.
The Treasury will suspend new investments in two government employee benefit funds: the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. This suspension, effective through March 14, will conserve borrowing capacity. Yellen emphasized that these funds will be replenished once the debt ceiling is raised or suspended.
“The period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the U.S. Government months into the future,” Yellen explained in her letter. She urged Congress to act promptly to safeguard the United States’ financial stability.
Historical Context and Political Dynamics
The debt ceiling, established in 1917, sets a cap on the amount the U.S. government can borrow to meet its financial obligations. The first modern aggregate debt limit, introduced in 1939, was set at $45 billion. Since then, Congress has approved 103 increases to the limit to accommodate rising expenditures. As of October 2024, publicly held debt was 98% of the U.S. gross domestic product, a sharp rise from 32% in October 2001.
In late December, Yellen warned that the debt cap would likely be reached between January 14 and 23, following Congress’s decision not to include an extension or repeal of the limit in a last-minute budget deal. President-elect Trump had previously criticized the failure to address the debt ceiling in 2023, calling it “one of the dumbest political decisions made in years.” Despite his criticism, many Republican lawmakers view the debt ceiling as a crucial bargaining tool in fiscal negotiations.
Challenges for the Incoming Administration
Scott Bessent, Trump’s nominee for Treasury Secretary, acknowledged the complexity of the debt ceiling during his Senate confirmation hearing last week. He described it as a “nuanced convention” and expressed willingness to work with Congress to explore options, including elimination of the limit if directed by the administration.
Budget analysts suggest that extraordinary measures could sustain the government’s borrowing needs for several months, depending on tax revenue performance. However, a failure to raise or suspend the debt ceiling could prevent the Treasury from meeting its obligations, with potentially severe economic repercussions.