(Bloomberg) — Treasury Secretary Janet Yellen said her department is likely to begin taking special accounting maneuvers sometime in mid-January to avoid breaching the US debt limit, and urged lawmakers to take action defending the “full faith and credit” of the US.
Most Read from Bloomberg
“On Jan. 2, 2025, the new debt limit will be established at the amount of outstanding debt,” Yellen wrote in a letter on Friday to House Speaker Mike Johnson and other congressional leaders.
The Treasury will be given a short reprieve, however, because outstanding debt is scheduled to decrease by $54 billion on Jan. 2, thanks to the expected redemption of securities held by a federal trust fund.
The extra headroom is likely to be exhausted by Jan. 14 to 23, Yellen said. At that point, the Treasury will resort to special accounting maneuvers to help keep the government funded.
Yellen gave no indication how long those measures, and the department’s cash reserves, are expected to last.
Wall Street has, however, begun providing estimates. Goldman Sachs Group Inc. economist Alec Phillips wrote in a Dec. 21 note that the ultimate “deadline for debt limit action is likely not until Jul.-Aug. 2025.”
Prolonged Tussle
Yellen’s letter kicks off what is likely to be a prolonged tussle over fiscal policy as the new administration led by Donald Trump takes office.
The party in opposition typically uses the need for congressional approval of raising or suspending the debt ceiling as leverage in broader negotiations over taxes and spending.
Some strategists have anticipated an easier path to an agreement to suspend or lift the cap given Republicans’ unified control of Congress. Yet last week, Trump failed to get a debt-ceiling measure attached to the latest temporary federal spending bill when members of his own party shot down a House version that included a two-year suspension.
A showdown over the debt ceiling could strain financial markets and put upward pressure on already-elevated US borrowing costs.
Debt ceiling brinkmanship is a recurring challenge for financial markets. Standoffs typically send front-end interest rates lower as the Treasury reduces its sales of short-term government debt when operating under the constraint of the limit.
Cash Cushion
The Treasury in October penciled in a $700 billion cash balance for Jan. 1, a figure it said was consistent with legislation passed in 2023. As of Dec. 26, the cash stockpile was $689 billion.