WASHINGTON — The United States hit a cap on how much money it can borrow, a development that resulted in the Treasury Department employing what are known as “extraordinary measures” to ensure that the federal government has enough money to pay its bills.
The United States runs a budget deficit, which means it does not take in enough money through taxes and other revenue to fund its operations. As a result, the country sells Treasury debt to finance its operations — using borrowed money to fund military salaries, retiree benefits and interest payments to bondholders who own U.S. debt.
But Congress limits the amount of money the federal government can borrow — what’s known as the “debt limit” — and the United States is hit the current cap of $31.4 trillion last week.
As a result, Treasury Secretary Janet L. Yellen told Congress last week that the administration would try to keep the country under that debt cap and able to finance its operations as long as possible by using “extraordinary measures.”
On Tuesday, Ms. Yellen announced that, as part of those measures, she would scale back investments in a retirement plan for federal employees.
“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” Ms. Yellen wrote in a letter to Speaker Kevin McCarthy.
While the term “extraordinary measures” suggests that such tools are intended to be used on rare occasions, Treasury secretaries from both parties have recently had to rely on such accounting maneuvers to allow the government to continue its operations for limited periods.
Understand the U.S. Debt Ceiling
What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the United States runs budget deficits, it must borrow huge sums of money to pay its bills.
What are extraordinary measures?
When the country comes close to — or hits — the statutory debt limit, the Treasury secretary can find ways to shift money around government accounts to remain under the borrowing cap, essentially buying time for Congress to raise the cap.
That includes seeking out ways to reduce what counts against the debt limit, such as suspending certain types of investments in savings plans for government workers and health plans for retired postal workers. The Treasury can also temporarily move money between government agencies and departments to make payments as they come due. And it can suspend the daily reinvestment of securities held by the Treasury’s Exchange Stabilization Fund, a bucket of money that can buy and sell currencies and provide financing to foreign governments.
After the debt limit impasse ends, programs whose investments were suspended are supposed to be “made whole.”
In the event that the statutory debt limit is breached, the Treasury Department broadly looks for ways to reduce different types of debt that the government incurs so that it can continue to pay its obligations on time. This allows the Treasury Department to reinforce its cash reserves without having to issue new debt.
Ms. Yellen started taking steps last week to buy lawmakers more time to reach a debt limit deal when she announced that she would redeem some existing investments and suspend new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund.
In her letter on Tuesday, Ms. Yellen said that she would be unable to invest fully the Government Securities Investment Fund of the Thrift Savings Fund in interest bearing securities. The fund, which is part of the Federal Employees’ Retirement System, will be made whole once the debt limit is raised or suspended, she told lawmakers.
What happens if a standoff persists?
If the initial steps that Ms. Yellen has outlined are not enough, there are other tools at her disposal.
A 2012 Government Accountability Office report said that to manage debt when the borrowing cap is in limbo, the Treasury secretary could suspend investments in the Exchange Stabilization Fund. Typically, funds that are not being used for those purposes are invested in Treasury securities that are subject to the debt limit, so halting these investments creates some additional wiggle room.
The Treasury Department also oversees the Federal Financing Bank, which can issue up to $15 billion of its own debt that is not subject to the debt limit. In a debt ceiling emergency, Ms. Yellen could exchange that debt for other debt that does count against the limit.
Another option would be for the Treasury Department to suspend new issuance of State and Local Government Series securities. The Government Accountability Office said such a move would reduce “uncertainty over future increases in debt subject to the limit.”
Are there risks to using extraordinary measures?
Delaying the debt limit does not come without costs.
Suspending certain investments can cost the federal government money in the longer term, and running the country on fumes can lead to market volatility.
“Debt limit impasses have also repeatedly disrupted implementation of Treasury’s cash management policy — with knock-on effects for money markets,” Joshua Frost, assistant Treasury secretary for financial markets, explained in a speech in December.
Mr. Frost added that the Treasury Department usually has a daily cash balance of $600 billion to $700 billion, but that during the 2021 debt limit standoff, there were days when it grew painfully close to zero. Such situations can force the Treasury Department to undertake risky moves such as issuing same-day cash management bills or conducting buybacks.
“There were several instances when we didn’t have sufficient cash on hand to meet even our next-day obligations,” Mr. Frost, who spoke at the Federal Reserve Bank of New York’s Annual Primary Dealers Meeting, said. “During the course of that impasse, Secretary Yellen wrote eight separate letters to Congress regarding the importance of acting to address the debt limit.”
How long do extraordinary measures last?
The timeline for using these measures is uncertain.
Christopher Campbell, who served as assistant Treasury secretary for financial institutions from 2017 to 2018, said that because there so many variables in play, it is often difficult to give a precise estimate of the grace period between when the debt limit is breached and when the United States potentially defaults on its obligations.
“It depends on receipts, it depends on how the economy is doing, it depends on how companies are doing,” Mr. Campbell said. “There are some shell games and accounting games that go into it.”
The Bipartisan Policy Center said in a 2021 report that the timing of when the debt limit hits plays a role in how long extraordinary measures might last. Big government expenses in February could mean that X-date, when the government runs out of cash, comes sooner than anticipated, while robust April tax receipts could buy more time for extraordinary measures to keep the lights on.
In a letter to Congress, Ms. Yellen said ominously that “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.” She then surmised that it is unlikely that cash and extraordinary measures will be exhausted before early June.