May 19, 2023 - Politics & Policy

Scoop: Yellen’s private warning to Wall Street

U.S. Secretary of the Treasury Janet Yellen speaks during the 2023 Independent Community Bankers of America (ICBA) Capital Summit on May 16, 2023 in Washington, DC. Photo: Alex Wong/Getty Images

Treasury Secretary Janet Yellen warned the country’s biggest bankers that a potential debt ceiling default will have repercussions beyond the financial system and insisted that the early June X-Date is real, Axios has learned.

Why it matters: The Biden administration is sounding the alarm in public and in private about the consequences of default, and the dangers in trying to cut a deal at the last moment.

  • Yellen’s frank talk with bankers, like JP Morgan Chase CEO Jamie Dimon, are part of a broader effort by top Biden officials to enlist the business community to pressure congressional Republicans to raise the country’s $31.6 trillion debt ceiling before June 1.
  • While some Republican senators have questioned that date, House Speaker Kevin McCarthy has seized it as a way to add urgency to negotiations.

The intrigue: The official readout of Yellen's meeting from the Treasury department included many of her previous warnings about the debt ceiling.

  • But it didn't mention at least two of her closed-door comments: that private forecasters have largely confirmed her early June estimates for when the U.S. will run out of money and that borrowing costs are already getting higher.

Driving the news: Yellen made her remarks in a closed-door meeting at the Bank Policy Institute, an industry association that advocates for the country’s largest lenders, in Washington on Thursday, according to a person in the room.

  • With talks proceeding between President Biden’s team and Rep. Garret Graves (R-La.), a key ally of House Speaker Kevin McCarthy (R-Calif), some progressive lawmakers are sounding the alarm about the potential direction of the talks.
  • At the same time, a group of House conservatives want to break off negotiations, insisting that the debt ceiling bill the House passed last month should be their final offer.

Between the lines: Some Biden officials have been mildly frustrated that the business community hasn’t tried to do more to influence Republicans to pass a debt ceiling increase.

  • But it’s unclear if the business groups – or even the markets — have that much influence with some of the most conservative members of Congress.

The big picture:Yellen has been warning about the consequences of default for months, with Biden weighing in on Wednesday before leaving for the G-7 summit in Japan.

  • “It would be catastrophic for the American economy and the American people if we didn’t pay our bills,” Biden said.

What we are watching: A group of 11 Senate Democrats, led by Sen. Bernie Sanders (I-Vt.), sent Biden a letter on Thursday urging him to "prepare to exercise your authority under the 14th Amendment" to raise the debt ceiling.

  • "We cannot reach a budget agreement that increases the suffering of millions of Americans," they wrote, arguing that it is "seemingly impossible to enact a bipartisan budget deal at this time."

But privately, Biden officials are deeply skeptical that invoking the 14th Amendment would forestall a negative market reaction or withstand judicial scrutiny.

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