September 20, 2021

Yellen triggers alarm bells over debt ceiling

 Analysts believe that the equity market is dropping due to fears that the Fed will announce a reduction in the quantitative easing program on Wednesday. However, there are other factors that are weighing on the stock market. US Treasury Secretary Janet Yellen has warned several times in recent months about a looming default if Congress fails to take action. Yellen said that the country could default on its debt unless Congress raised its limit. Notably, the level of the government's borrowings is usually high. The Fed prints money if needed, while the US Treasury attracts money by placing bonds or taking various loans. This is why Congress needs to act now to make sure the US does not default on some of its obligations. When the total amount of the US government's debt approaches the limit (which is set by law), it poses a threat of a technical default.

However, some experts believe that this problem is a bit exaggerated. Since 1919, when the law on the national debt limit was passed (which states that the US government is not allowed to borrow more than the amount specified in the law), the limit has already been increased more than 70 times or about once a year. Thus, the problem is usually tackled when Congress approves to raise the limit. This is why this time, something similar may happen. So, congressmen are not in a hurry to solve this problem. In order to raise the limit, the majority of congressmen should vote for the increase in public debt. For this reason, a discussion between politicians may take time. The US Treasury has to wait. It has already warned congressmen that the funds may run out as early as October. Jane Yellen states that the inaction of politicians may lead to the fact that the government will not be able to fulfill its obligations on debts. Thus, it will be forced to suspend the financing of some state structures. "A delay that calls into question the federal government's ability to meet all its obligations would likely cause irreparable damage to the US economy and global financial markets," Yellen added. However, experts have no doubt that Democrats will be able to approve the increase in the limit and the proposal will be put to a vote at the end of September. Additionally, Democrats hold the necessary majority in both chambers of Congress. Thus, they do not even need the approval of Republicans to make this decision. Janet Yellen also said that the suspension of the US debt limit ended on July 31. Yet, the Treasury found a way to prevent a technical default by taking emergency measures.

Thus, some tension in the stock market may be due to fears over the public debt. As for the Fed, it will announce its decision on the QE program before the end of September.