Yellen warns McCarthy of default due to debt ceiling deadlock.

Treasury Secretary Janet Yellen has issued a renewed—and alarmist—warning to House Speaker Kevin McCarthy (R-Calif.) and other congressional leaders, reiterating her earlier position that the country could run out of money to pay its debt obligations as early as June 1, but this time around expressing more confidence in her dire prediction.

Yellen has repeatedly warned that the debt ceiling deadlock grinding on in Washington is pushing the country closer to the so-called X-date, when the Treasury Department’s bag of accounting tricks (known as “extraordinary measures”) runs out and the government faces the prospect of a debt default.

In her first letter to McCarthy on May 1 (pdf), Yellen said it was the Treasury Department’s “best estimate” that it would be unable to continue to satisfy all of the government’s debt obligations by early June and potentially as early as June 1. She reiterated that view in a May 15 letter, in which she noted it’s impossible to predict the exact timing of the X-date.

But in a new letter (pdf) to McCarthy and congressional leaders on Monday, Yellen’s rhetoric took a more alarmist tone, saying that incoming data show it’s now “highly likely” that the government will run out of money as early as June 1.

“With an additional week of information now available, I am writing to note that we estimate that it is highly likely that Treasury will no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1,” Yellen wrote.

Yellen’s increased confidence in her X-date estimate stands in some contrast to a projection from Goldman Sachs, which expects the country to have a bit more runway—until June 8—before it runs out of money. Still, the investment bank warned that “waiting for the last minute isn’t necessarily the right move, even though we think that maybe they could go a little longer.”

McCarthy and the Republicans have been deadlocked in debt cap talks with President Joe Biden and the Democrats, with the latest negotiating session on Monday failing to deliver a breakthrough.

In seeking to push those talks forward, Yellen urged the sides to find a solution “as soon as possible” while warning 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.”

Already there have been signs of stress in Treasury markets, with the government’s borrowing costs for securities maturing in early June seeing a spike.

‘Productive’ Meeting But No Deal

McCarthy and Biden emerged on Monday from a 90-minute negotiating session at the White House on Monday saying that some progress had been made but with no substantial breakthrough.

The two struck somewhat optimistic tones in separate remarks to reporters after the meeting, while calling for further progress in averting a default.

“I think the tone tonight was better than any other time we’ve had discussions,” McCarthy said. “We still will have some philosophical differences, but I felt it was productive … and I think we were able to really focus on the areas of difference.”

Biden struck a fairly optimistic note when discussing the talks, while offering hope for reaching a deal to raise the nation’s $31.4 trillion debt limit.

“I just concluded a productive meeting with Speaker McCarthy about the need to prevent default and avoid a catastrophe for our economy,” the president said in a statement on Twitter.

“We reiterated once again that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement. While there are areas of disagreement, the Speaker and I, and his lead negotiators Chairman McHenry and Congressman [Garret] Graves, and our staffs will continue to discuss the path forward.”

Rep. Patrick McHenry (R-N.C.), the lead negotiator for the Republicans, said the meeting provided some added clarity.

“We got very good direction from the speaker and from the president, the speaker to his team, and the president to his team in the same room. We’re on the same page where the same set of issues got to work through it was productive,” McHenry said.

“The teams in the room have built some level of relationship and trust that we can actually get a product that is mutually agreeable to,” McHenry added.

McCarthy declined to specify any points of agreement thus far, telling reporters on Capitol Hill that, “we don’t agree to anything until we agree to everything.”

Imminent Compromise?

Despite the lack of a breakthrough, there is hope that a compromise can be reached before the country reaches the X-date. Both sides have expressed a willingness to work together and find a solution to avoid a catastrophic default.

Here are some possible solutions:

• Raise or suspend the debt limit
• Pass a short-term spending bill to buy more time for negotiations
• Use reconciliation to pass a debt limit increase with a simple majority vote

Whatever the solution, it’s clear that action needs to be taken soon to avoid a potentially disastrous outcome for the US economy.

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