The U.S. risks defaulting on its debts as early as July unless the borrowing limit is raised, the nonpartisan Congressional Budget Office said in a report last month.
Federal Reserve Chair Jerome Powell on Tuesday warned of potentially devastating consequences of a U.S. debt default and called on Congress to raise the debt ceiling.
In addition to comments about the debt ceiling, Powell spoke at length about inflation, which has fallen significantly from a summer peak but is more than triple the Fed’s target of 2%.
Speaking to the Senate banking committee, Powell said a potential U.S. debt default could be “extraordinarily adverse and do longstanding harm.”
“At the end of the day, there is only one solution to this problem and that is Congress,” he added. “Congress really needs to raise the debt ceiling. That’s the only way out.”
The federal government on Jan. 19 reached its approximately $31.4 trillion debt ceiling — which legally caps how much the U.S. can borrow to pay for what tax and other revenue doesn’t cover — and the Treasury Department has since been using “extraordinary measures” along with its current cash flow to keep the government’s obligations paid.
The remarks from Powell add urgency to an ongoing political dispute in Congress over the debt ceiling.
Some Republicans in the House have resisted an increase of the debt limit unless Democrats agree to spending cuts. The Biden administration, however, has repeatedly said that it will not negotiate over the debt ceiling and that a discussion over spending should occur separately.
Failure to raise the debt limit and the ensuing default on U.S. debt — which have never happened before — would all but ensure a U.S. recession that could put millions out of work, economists and budget analysts previously told ABC News.
When asked whether the current uncertainty about a debt ceiling increase has damaged the economy, Powell said, “In principle, it could.”
“I think markets tend and observers tend to watch this and tend to think that it will work out and it has in the past worked out,” he added. “And it needs to work out this time, too.”