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Yellen Plans X-Date Update, Defends Biden’s Spending Plans

(Bloomberg) -- Treasury Secretary Janet Yellen will update Congress on how close the US is to defaulting on its financial obligations within the next two weeks and defended the steep rise of debt issuance under the Biden administration.

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“I don’t want to be specific about when we do updates — when we think we have more information, but certainly within the next couple of weeks,” Yellen said Saturday in an interview with Bloomberg News in Niigata, Japan. She last wrote to lawmakers on May 1, telling them her department could run out of cash as soon as June 1.

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A day after the Congressional Budget Office’s updated projections showed it expects the US debt to hit 119% of gross domestic product by 2033, the highest in US history, the Treasury chief responded to concerns over the level of federal borrowing.

“We proposed $3 trillion of deficit reduction over 10 years, and I would say the fiscal path involved in our budget is reasonable,” Yellen said. She acknowledged the level of debt could present problems, especially if interest rates stay elevated in the long run.

Budget talks between White House staff and aides to Congressional leaders continued over the weekend after a planned Friday meeting with President Joe Biden and House Speaker Kevin McCarthy was delayed until next week in what each side said was a sign of progress.

The US Treasury Department said Friday it had just $88 billion of extraordinary measures to help keep the government’s bills paid as of May 10. That’s down from around $110 billion a week earlier and means just over a quarter of the $333 billion of authorized measures are still available to keep the country from running out of borrowing room under the statutory debt limit.

Yellen spoke as she wrapped up three days of talks with finance ministers and central bank governors from Group of Seven countries. As officials discussed plans to shift global supply chains, sanctions against Russia and other topics, Yellen was continually asked by the media and her counterparts about the crisis looming over the US.

In an interview with Bloomberg Television on Friday, she said the US would be forced to renege on some obligations if Congress doesn’t raise the debt ceiling in time. She said no plan on whether or how to prioritize some payments over others had yet been presented to Biden and the only good fix is to raise the cap.

“We have to default on some obligation, whether it’s Treasuries or payments to Social Security recipients,” she said in the Friday interview. “That’s something America hasn’t done since 1789. And we shouldn’t start now. So we’ve not discussed what to do.”

Other G-7 attendees offered optimism that the issue would be resolved before it disrupted global financial markets.

“There is a strong feeling in the room of support for the administration effort, and to Janet specifically,” European Commissioner and former Italian Prime Minister Paolo Gentiloni said Friday in a separate interview with Bloomberg TV. “It’s an internal issue, of course with enormous impacts in the world, but the impression I feel is that we are convinced that the common interests will prevail.”

Mathias Cormann, secretary general of the Organization for Economic Cooperation and Development, was less sanguine.

“There’s just no need for a self-inflicted problem that comes on top of all of the other issues we’re already facing in the global economy right now,” he said in a Bloomberg TV interview on Thursday.

UK Chancellor of the Exchequer Jeremy Hunt also sounded the alarm.

“It would be absolutely devastating if America, which is one of the biggest motors of the global economy, was to have its GDP knocked off track by failure to reach agreement,” Hunt said after the G-7 talks wrapped on Saturday.

Real Estate Risk

In Saturday’s interview, Yellen sounded notes of caution, not only from the showdown over the debt ceiling, but also from rising interest rates and the deteriorating state of the commercial real estate sector.

“My sense is that the lending standards have been relatively conservative at banks,” she said of loans to commercial real estate players. “But on the other hand, you’ve had a huge shock to the demand for office space from the pandemic and you have higher interest rates.”

She said she expected regulators would be looking “very carefully” at bank exposure to the sector, with that task also “part of ongoing supervision.” She added, “I don’t think this is an out-sized financial stability risk.”

Debt Concerns

Yellen’s go-to metric on debt is inflation-adjusted interest costs as a proportion of GDP. She said the Biden administration projects that reaching slightly above 1%, which she called “perfectly reasonable.”

“If we’re looking at something like 1% real net-interest, that isn’t something to feel we’re in a catastrophic situation,” she said.

Federal Reserve Chair Jerome Powell has repeatedly said he’s worried about the future path of US debt, and former Treasury Secretary Robert Rubin said in recent days the debt’s trajectory wasn’t sustainable.

Yellen reiterated that she sees a path for inflation returning close to the Fed’s 2% target without a meaningful uptick in unemployment. Asked if the odds of recession in the next 12 months were below 50%, Yellen paused and then demurred.

“I’m not sure I want to attach a number to probabilities,” she said. “Obviously, the economy’s slower and there are significant potential shocks, including the debt ceiling, the Fed is tightening monetary policy.”

Despite the downside risks, she said consumer spending is holding up and the labor market continues to perform “remarkably well.”

Unemployment declined to 3.4% in April, matching a multi-decade low. The consumer price index edged down to 4.9% in April.

“If you ask me what would I expect to see along a path that was going to bring inflation down while maintaining a strong labor market, I would say that everything we’re seeing now remains consistent with that path,” she said.

--With assistance from Christopher Anstey and Josh Wingrove.

(Updates with weekend talks in fifth paragraph.)

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