What Happens When U.S. Reaches Debt Limit as Ceiling Inches Closer

U.S. Treasury Secretary Janet Yellen warned House Speaker Kevin McCarthy in a letter on Friday that the U.S. government is projected to reach its debt limit on January 19, leaving less than a week for lawmakers to act to raise the limit.

"Failure to meet the government's obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability," Yellen wrote in the letter, which was also sent to several other Republican and Democratic leaders in the House and Senate.

The debt limit is the cap on the amount of money that the U.S. government can borrow to pay its debts. It allows the U.S. government to pay existing legal obligations that Congress and presidents have made in the past, according to the Treasury Department.

The department has warned that failure to raise the debt ceiling before it is reached would have "catastrophic economic consequences."

"It would cause the government to default on its legal obligations—an unprecedented event in American history," the Treasury Department wrote on its website. It added that such a default "would precipitate another financial crisis and threaten the jobs and savings of everyday Americans."

If the U.S. government does default on its legal obligations, this could have far-reaching consequences for Americans. In an October 2021 article, the White House Council of Economic Advisers (CEA) wrote that the "basic functions" of the federal government would be impaired.

For example, tens of millions of people who rely on federal assistance, such as Social Security benefits, health coverage through Medicare and veterans' programs, would potentially face losing benefits or coverage or not getting them on time, the CEA wrote.

If not resolved, the consequences of a default could "accelerate rapidly" and potentially induce a global financial crisis and recession, the CEA said.

The Treasury Department does have the ability to take action to temporarily stop the U.S. from defaulting on its debt without congressional action if the limit is reached.

Yellen wrote in the letter to McCarthy that the Treasury anticipates implementing two measures to avoid breaching the debt limit: redeeming existing and suspending new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund, as well as suspending reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan.

But Yellen warned that it was unclear how long the Treasury actions may last, since the period of time "is subject to considerable uncertainty due to a variety of factors, including the challenges of forecasting the payments and receipts of the U.S. government months into the future."

"While Treasury is not currently able to provide an estimate of how long extraordinary measures will enable us to continue to pay the government's obligations, it is unlikely that cash and extraordinary measures will be exhausted before early June," Yellen wrote.

"Consistent with past practice, I will, of course, continue to keep Congress informed as we approach the exhaustion of our resources," she added.

"I respectfully urge Congress to act promptly to protect the full faith and credit of the United States," Yellen concluded the letter.

McCarthy, who was elected as House speaker last week after more than a dozen rounds of voting, said Thursday that though he wants to negotiate spending cuts in exchange for raising the debt limit, the GOP won't risk putting the government in a position where it can't pay its bills, Roll Call reported.

Newsweek reached out to McCarthy for comment.