America’s two top economic policymakers warned lawmakers on Tuesday that the Delta variant of the coronavirus has slowed the economic recovery but conveyed optimism about the economy’s overall trajectory.
Treasury Secretary Janet L. Yellen and the Federal Reserve chair, Jerome H. Powell are testifying before the Senate Banking Committee at a critical moment. Businesses are facing labor shortages and consumers are coping with rising prices amid a resurgent pandemic. Congress is also grappling with a thicket of legislative challenges in the coming days, all of which could have an impact on the economy.
That includes the need to extend federal funding to avoid a U.S. government shutdown, raising the debt limit to prevent defaulting on the nation’s financial obligations and passing President Biden’s infrastructure and social safety net packages.
In a letter to Congress ahead of the hearing and in her opening remarks, Ms. Yellen said that Treasury is likely to exhaust the “extraordinary measures” she has been employing to delay a default if Congress has not acted to raise or suspend the debt limit by Oct. 18.
“At that point, we expect Treasury would be left with very limited resources that would be depleted quickly,” she said. “It is uncertain whether we could continue to meet all the nation’s commitments after that date.”
For weeks, Ms. Yellen has been quietly pressing lawmakers to put politics aside and ensure that the United States can continue to meet its fiscal obligations. She has been in touch with Wall Street chief executives and former Treasury secretaries as she looks to keep markets calm and find allies who can help her make the case to recalcitrant Republicans, who believe Democrats must deal with the debt limit on their own.
“It is imperative that Congress swiftly addresses the debt limit,” Ms. Yellen said. “The full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession.”
Ms. Yellen also warned that the economy, while strengthening, is still in a “fragile” state.
“While our economy continues to expand and recapture a substantial share of the jobs lost during 2020, significant challenges from the Delta variant continue to suppress the speed of the recovery and present substantial barriers to a vibrant economy,” Ms. Yellen said in her opening remarks. “Still, I remain optimistic about the medium-term trajectory of our economy, and I expect we will return to full employment next year.”
Mr. Powell told senators that the Fed will continue to support the economy with its monetary policies, which influence how expensive it is to borrow and spend. But he also made it clear that Fed officials will act if a recent jump higher in prices persists.
“Inflation is elevated and will likely remain so in coming months before moderating,” Mr. Powell said in his prepared remarks.
He cited the lingering coronavirus pandemic as a risk to the economic outlook, according to his prepared statement.
Mr. Powell has also fretted about the debt limit in recent weeks, saying during a news conference last week that default is “just not something that we should contemplate,” and that “no one should assume that the Fed or anyone else can protect the markets or the economy in the event of a failure, fully protect in the event of a failure to make sure that we do pay those debts when they’re due.”
Ms. Yellen and Mr. Powell will testify again on Thursday before the House Financial Services Committee.
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