Yellen urges Congress to raise or suspend the debt limit by Aug. 2

Treasury Secretary Janet Yellen on Friday warned Congress that her department will need to embark on “extraordinary measures” on Aug. 2 to prevent the U.S. government from defaulting if lawmakers are unable to strike a deal to raise or extend the debt ceiling.

In a letter to House Speaker Nancy Pelosi, D-Calif., Yellen put lawmakers on notice that the Treasury Department will at the end of July suspend the sale of bonds, the avenue by which the U.S. finances its debt obligations.

After Aug. 2 and barring a debt limit agreement, the Treasury will start taking “extraordinary measures” to pay for Congress’ legal and financial obligations, a temporary fix that allows the secretary to tap additional government accounts for a period of weeks.

“The period of time that extraordinary measures may last is subject to considerable uncertainty due to a variety of factors, including the challenges of forecasting the payments and receipts of the U.S. government months into the future, exacerbated by the heightened uncertainty in payments and receipts related to the economic impact of the pandemic,” Yellen told Pelosi in a letter.

The message between the Treasury secretary and the House speaker is a required formality should the outstanding debt of the U.S. near its statutory limit. While the extraordinary measures have been deployed in the past to prevent a default, it’s unclear how long Yellen’s emergency capital will last in the face of unprecedented stimulus efforts sparked by the Covid-19 crisis.

While the United States has never defaulted on its debt, recent history shows that getting uncomfortably close to it can create chaos. In 2011, House Republicans’ refusal to pass a debt ceiling increase led to a downgrade of the U.S. sovereign credit rating that upset financial markets.

Economists say default, though extremely unlikely, would be a catastrophic event and would pose a significant threat to several sectors of the American economy.

Asked about Yellen’s letter, White House press secretary Jen Psaki stressed that the communication should be taken in context and noted that similar letters have been sent in prior administrations.

The letter is “standard practice for Treasury secretaries when a debt limit is going to be reimposed,” Psaki said Friday afternoon. “During the previous two administrations, the Treasury secretary sent nearly 50 letters to the Hill on the debt limit, some of which were very similar, in wording and asks and updates, to this letter.”

Despite the administration’s calm, it is virtually certain Congress will breach that Aug. 2 deadline with Democrats and Republicans gridlocked on several key pieces of legislation. Perhaps most notable is that Senate Majority Leader Chuck Schumer, D-N.Y., remains far away from compromise over a trillion-dollar physical infrastructure deal.

House Democrats insist that they won’t pass a bill to improve the nation’s roads, bridges, broadband and waterways without a separate piece of legislation modeled after President Joe Biden’s American Families Plan to support paid worker leave, labor education and other programs.

For his part, Senate Minority Leader Mitch McConnell, R-Ky., told Punchbowl News earlier this month that he “can’t imagine a single Republican” voting to raise the debt limit amid Democrats’ “free-for-all for taxes and spending.”

— CNBC’s Kevin Breuninger contributed reporting.