Sat, 13 May 2023 at 2:46 am BST
(Bloomberg) — Treasury Secretary Janet Yellen said she expects to update Congress within the next two weeks on how close the federal government is to defaulting on its financial obligations.
“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.
Yellen last wrote to lawmakers on May 1, telling them the Treasury could run out of cash as early as June 1.
As the White House and congressional Republicans continue to wrestle in Washington over the debt ceiling and government spending, Yellen defended the steep rise of debt issuance under the Biden administration and her optimistic outlook for the US economy.
At the same time, she sounded notes of caution, not only over the risk of a debt default, but also 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 lending in commercial real estate. “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 and that task is also “part of ongoing supervision.” She added, “I don’t think this is an out-sized financial stability risk.”
The Treasury chief responded to growing worries over the level of federal borrowing — the issue that’s spurred Republicans to dig in their heels over the debt ceiling. The Congressional Budget Office on Friday updated its projections, saying it expects the US debt to hit 119% of gross domestic product by 2033, the highest in US history.
“We proposed $3 trillion of deficit reduction over 10 years, and I would say the fiscal path involved in our budget is reasonable,” 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’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.”
She acknowledged the level of debt could present problems, especially if interest rates remain elevated in the long run.
“But 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.
Yellen also continued to say she sees a path for inflation to return 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.”
“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.”
Yellen spoke as she prepared to wrap up three days of meetings with finance officials from Group of Seven nations in Niigata. She cut short her original schedule for the trip to minimize her time away from Washington while lawmakers and the White House try to hammer out a deal over the debt limit.
President Joe Biden and congressional leaders are planning to resume discussions on the debt ceiling next week. They had been scheduled to meet Friday, but the session was postponed as Republican and Democratic staff members continue to negotiate.
–With assistance from Christopher Anstey.