Fed Chair Urges Congress to Raise Debt Limit as Government Risks Default

July 11, 2019 Updated: July 11, 2019

WASHINGTON—Federal Reserve Chairman Jerome Powell urged Congress to raise the federal debt ceiling “in a timely way” to avoid “highly unpredictable” damage to the economy.

In testimony before the Senate Banking Committee on July 11, Powell said it’s “essential” for lawmakers to raise the debt limit so the U.S. government can pay its bills on time.

“Any other outcome is unthinkable. We’ve always paid our bills and it simply must happen that Congress raises the debt ceiling in time to allow that to happen,” he said.

“The consequences of failing to do so would be highly unpredictable and no one should assume that the Fed or any other agency can be relied upon to shield our economy from the short, medium, and long-term negative consequences of such an act,” he warned.

According to the think tank Bipartisan Policy Center (BPC), there is a “serious risk” that the government could reach its debt ceiling in early September if Congress fails to extend the limit.

Federal revenues for fiscal year 2019 have been sluggish, due to lower than expected corporate income tax collection, a BPC report said.

“It would be reckless for policymakers to run the risk of default by failing to deal with the debt limit in advance of the August recess,” the report stated.

Congress will be in recess for six weeks starting July 26, raising doubts about reaching a deal before the break.

“Markets have seen this movie and they think they know how it ends,” Powell said.

“Clearly everyone’s assuming that this will get worked out,” he added. “And if that weren’t to happen, that would be, I think, a big surprise and not a good one.”

Treasury Secretary Steven Mnuchin on July 10 urged Congress to raise the debt ceiling before the August recess.

He held urgent talks with top congressional leaders to tackle budget caps and borrowing limit issues, and reach a deal to avert another government shutdown on Oct. 1.

“There were some outside numbers about the debt ceiling and that’s something we’re having discussions about, updating the numbers and potentially the need to do something before everybody leaves,” he told reporters on July 10.

Mnuchin has urged Congress to raise the debt ceiling for months. He warned during a congressional hearing in May that the U.S. government would face default in “late summer” unless Congress increases the debt ceiling.

The debt limit was reinstated at $22 trillion on March 2, 2009.

The debt limit—commonly called the debt ceiling—is the total amount of money that the U.S. government can borrow to meet its obligations, including Social Security and Medicare benefits. Since the federal government runs a deficit, the Treasury needs to borrow from the public to finance its obligations. And the debt limit puts a cap on the borrowing.

House Speaker Nancy Pelosi (D-Calif.) on July 11 didn’t make any commitments about the timing of a vote to raise the debt ceiling.

“We don’t want there to be any doubt about the full faith and credit of the United States of America,” she told reporters. “We’ll just see about the timing. We’re having our back-and-forth conversations.”

Uncertainties Weigh on Outlook

Powell delivered two days of testimony on Capitol Hill beginning July 10. During his testimonies in both the Senate and the House, the Fed chief signaled that the central bank was moving toward cutting interest rates later in July.

“Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee’s 2 percent objective,” Powell said.

“However, uncertainties about the outlook have increased in recent months,” he said, adding that the global economic slowdown could affect the U.S. economy.

“Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit.”

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