Continue funding the United States government — or the economic recovery from the coronavirus pandemic could grind to a halt just as the Delta variant threatens hard-won progress. That’s the urgent message Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell conveyed to US lawmakers on Tuesday.
Yellen and Powell testified before the Senate Committee on Banking, Housing, and Urban Affairs about the progress that has been made in bringing the US back from the worst economic downturn since the Great Depression of 1929-1939. They also warned in no uncertain terms about the risks that remain if Congress fails to pass a bill to fund the government and raise the country’s debt ceiling next month.
On Monday, Senate Republicans blocked an emergency spending bill that would avert a government shutdown by October 1 and a federal debt default that is expected in mid to late October.
Such a default could jeopardise confidence in the US dollar as a global reserve currency, Yellen said, and delay Social Security payments, paycheques for military personnel and other government payments that large groups of Americans rely on to make ends meet.
“It is imperative that Congress address the debt limit,” Yellen said in her prepared testimony on Tuesday. “If not, our current estimate is that Treasury will likely exhaust its extraordinary measures by October 18. At that point, we expect Treasury would be left with very limited resources that would be depleted quickly. America would default for the first time in history. The full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession as a result.”
Raising the debt ceiling is “necessary to avert a catastrophic event for our economy”, she added, pointing out that it has been raised or suspended 78 times since 1960 by lawmakers from both of the country’s major political parties.
Powell told lawmakers he agreed with Yellen’s assertion that should the US default on its debt, it would have “devastating” consequences.
“I think it’s essential to raise the debt ceiling in time to avoid payment defaults of any kind, and the potential effects could be severe,” Powell said.
The hearing also came at a time when a raft of economic data shows the US recovery is slowing and pain points such as inflation and labour shortages are persisting. A surge in coronavirus cases caused by the Delta variant in some regions — and the stalling of vaccination rates across the US — continue to threaten progress.
In her testimony, Yellen called the recovery “fragile, but rapid”, while Powell testified that the “path of the economy continues to depend on the course of the virus, and risks to the outlook remain”.
Data published on Tuesday by the Conference Board showed US consumer confidence hit a seven-month low in September “as the spread of the Delta variant continued to dampen optimism”, said Lynn Franco, the group’s senior director of economic indicators.
“Concerns about the state of the economy and short-term growth prospects deepened, while spending intentions for homes, autos, and major appliances all retreated again,” Franco said in a statement. “Short-term inflation concerns eased somewhat, but remain elevated.”
Americans have grappled with rising prices for everything from food to gasoline in recent months, with the consumer price index rising 0.3 percent in August, according to US Bureau of Labor Statistics data. All told, consumer prices are up 5.3 percent from last August.
On Tuesday, the latest Federal Housing Finance Agency House Price Index showed house prices were up 1.4 percent from the previous month, and up 19.2 percent from July 2020 to July 2021.
At the same time, millions of Americans remain out of work even as employers in some sectors try to lure them back with sign-on bonuses, higher wages and other incentives.
Powell acknowledged the US is still far from its goal when it comes to the labour market, testifying that “factors related to the pandemic, such as caregiving needs and ongoing fears of the virus, appear to be weighing on employment growth”.
‘A rebound was never a foregone conclusion’
But both economic policymakers emphasised the solution isn’t to pull back on spending now. In their respective testimonies, Yellen and Powell emphasised that the US economic recovery was aided in large part by fiscal policy that helped avert a worse recession, including the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
“In response to the crisis, we took broad and forceful measures to support the flow of credit in the economy and to promote the stability of the financial system at the onset of the pandemic,” Powell said in his testimony Tuesday.
“Our actions, taken together, helped unlock more than $2 trillion of funding to support businesses large and small, non-profits, and state and local governments between April and December of 2020. This, in turn, helped keep organisations from shuttering and put employers in a better position to keep workers on and to hire them back as the recovery continues.”
Yellen said the passage of the CARES Act, the Consolidated Appropriations Act and the American Rescue Plan all helped the US bounce back.
“A rebound like this was never a foregone conclusion,” she said in her testimony. “In fact, the American recovery is stronger than those of other wealthy nations. One key factor for our overperformance is the policy choices that Congress has made over the past 18 months.”
But Republican senators grilled the two top economic policymakers on the necessity of all this economic aid, with some arguing that the US spent too much and that the bill — in the form of ballooning national debt — is now coming due.
Yellen pointed out that the COVID-19-related spending was authorised by both the administrations of Republican former President Donald Trump and current Democratic President Joe Biden, which makes raising the debt ceiling a bipartisan responsibility.
“Raising the debt limit allows us to pay bills that were incurred because of those acts and others of Congress,” Yellen said.
Continued support needed
Yellen and Powell’s appearance on Capitol Hill came at a critical time when Biden and Congressional Democrats are trying to rally support for more government spending in the form of two bills: the $550bn Bipartisan Infrastructure Deal and the Build Back Better Act, multitrillion-dollar legislation that would expand the US’s social safety net. Democrats in the House of Representatives could vote on the infrastructure bill as early as this week.
Powell pointed out in his testimony that while some of the aid provided under the CARES Act has wound down already, the Fed is committed to providing ongoing support for the US economy as it works towards its goals of maximum employment, price stability and a stable US financial system.
“We at the Fed will do all we can to support the economy for as long as it takes to complete the recovery,” Powell told lawmakers.
Powell and Yellen are next due to testify before the House of Representatives Committee on Financial Services on Thursday.