Treasury Secretary Janet Yellen said the only solution to avoid a U.S. default crisis is for Congress to increase the federal debt limit, avoiding engaging with other proposed stopgap measures including short-term extensions or spending cuts.

“It’s overly necessary for Congress to raise the debt limit, and I hope they do so in a timely way before we come to a crisis,” she said in an interview Thursday. “I’m not going to comment on rumors about what they are or are not considering,” she said, referring to a proposal mulled by House Republican leaders to push the federal debt ceiling until Sept. 30.

Democrats and Republicans remain locked in a confrontation over the government’s legal debt limit, with the stability of global financial markets and the U.S. economy hanging in the balance.

Yellen has consistently rejected the idea that Democrats should compromise by allowing spending cuts that Republicans are demanding in return for lifting the ceiling. She’s also dismissed arguments that the Treasury should prepare for technical steps that would minimize the impact of a default, or resort to gimmicks, like minting a $1 trillion coin.

However, President Biden’s administration may not have public opinion on its side. A recent survey conducted by The Harris Poll found 66% of respondents believed Republicans should only increase the ceiling after extracting constraints on future spending from Democrats.

Yellen on Thursday — speaking with Bloomberg News while in Johannesburg, South Africa — said that the administration has held regular meetings on how to communicate its stance on the issue, but no coordinated public opinion push has yet been formulated.

Payment priorities

During the 2011 debt-ceiling crisis, the Obama administration considered prioritizing interest payments on debt over other obligations, which became public when transcripts of discussions at the Federal Reserve’s Open Market Committee on the plan were released five years later.

The Treasury secretary, who was then Fed vice chair, said that plan was never agreed to.

“We do talk about what kinds of things are feasible, but even there, if you look at the FOMC discussion of that, you have no guarantees that would work,” she said.

By law, the federal government’s debt cannot exceed $31.4 trillion — a cap that was reached on Jan. 19. The Treasury has said it can hold out at least through early June by using special accounting maneuvers, but may default on payment obligations any time after that if the limit isn’t raised.

“We feel strongly it will be a calamity not to raise the debt ceiling,” Yellen said.

Debt sustainability

The Treasury chief said there was no reasonable argument to be made that the U.S. debt is at a dangerous level. The best metric for measuring the sustainability of the debt load, she said, is inflation-adjusted net interest payments as a proportion of gross domestic product.

That has averaged close to 2% historically, and ran at around 1% over the past decade, including a stretch when it was negative. It has more recently leveled off at just under 1%, Yellen said, “and 1% real net interest burden as a share of GDP is absolutely fine. There’s nothing worrisome about that.”

Republicans have pointed to the spike in spending during the COVID pandemic, and to rising interest rates that are causing interest payments to soar, as reasons for concern.

“The idea that we’re in reasonable fiscal shape did not hinge on the idea that interest rates will always stay at zero forever,” she said. “That was never the assumption.”

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