US Treasury to Implement Extraordinary Measures to Avoid Default

As the U.S. government approaches the debt ceiling, Treasury Secretary Janet Yellen has announced that the department will begin taking extraordinary measures to avoid a default. In a letter to congressional leaders, Yellen stated that the Treasury will start using these measures on January 21, 2025, and urged lawmakers to act promptly to protect the full faith and credit of the United States.

The extraordinary measures that the Treasury Department will employ include redeeming a portion of, and suspending full investments in, the Civil Service Retirement and Disability Fund. Additionally, the Treasury will suspend additional investments of amounts credited to the Postal Service Retiree Health Benefits Fund. These measures will be taken to make up for the shortfall in money and will be made whole after Congress acts on the debt ceiling.

The period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the U.S. government months into the future. Yellen emphasized the importance of Congress acting promptly to avoid a default, which could have severe economic consequences.

The Treasury's extraordinary measures and the looming debt ceiling deadline have already started to impact financial markets. Yields on short-duration Treasury bills around the expected X-date have increased by nearly 1 percentage point, or roughly 20 percent, since mid-April. Additionally, credit default swap (CDS) spreads, which reflect increased worries about a U.S. default, have risen substantially and are now at an all-time high.

As the debt ceiling deadline approaches, market volatility is expected to increase, with potential disruptions in financial markets, including equity and corporate bond markets. An actual breach of the debt ceiling would likely cause severe damage to the U.S. economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions.




In conclusion, the Treasury Department's extraordinary measures and the looming debt ceiling deadline highlight the importance of addressing the debt ceiling issue promptly to avoid severe economic consequences. Investors should stay informed about the developments and consider the potential market reactions when making investment decisions.

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