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If the debt ceiling is not raised in time, the U.S. will default, which would trigger a financial crisis and undermine the U.S. dollar, U.S. Treasury Secretary Janet Yellen told the U.S. Senate on Tuesday.
"If the debt ceiling is not raised, there would be a financial crisis, a calamity. It would undermine confidence in the dollar as a reserve currency … It would be a wound of enormous proportions," Yellen said during her testimony before the U.S. Senate.
A U.S. default would also undermine the confidence in the U.S. government, Yellen added, urging how critical it is to act now.
"It is imperative that Congress swiftly addresses the debt limit. If it does not, America would default for the first time in history. The full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession," she stated.
In a separate letter to sent Congress on Tuesday morning, Yellen clarified that the debt ceiling needs to be raised by October 18 to avoid an economic calamity.
"We now estimate that Treasury is likely to exhaust its extraordinary measures if Congress has not acted to raise or suspend the debt limit by October 18," she wrote. "At that point, we expect Treasury would be left with very limited resources that would be depleted quickly. It is uncertain whether we could continue to meet all the nation's commitments after that date."
Raising the debt ceiling is about paying the existing bills, and it is "necessary to avert a catastrophic event for our economy," Yellen noted.
The gold market struggled in light of Yellen's comments as U.S. Treasury yields climbed to three-month highs and U.S. stocks tumbled. December Comex gold futures saw double-digit losses and were last trading at $1,739.80, down 0.70% on the day.
Federal Reserve Chair Jerome Powell also testified alongside Yellen, telling U.S. Senators that potential effects could be "severe" if the debt ceiling is not raised.
Powell was also grilled on inflation, Fed's maximum employment goals, and the recovery progress.
On inflation, Powell stated that price pressures have been elevated and "will likely remain so in coming months before moderating."
Supply bottlenecks and higher demand are at the heart of inflation, he noted. "These effects have been larger and longer-lasting than anticipated, but they will abate, and as they do, inflation is expected to drop back toward our longer-run 2 percent goal," he said.
On tapering, Powell noted that the test had been all but met. However, the maximum employment goal is still a long way away.
At the September monetary policy meeting, Powell said that tapping will likely begin in November and will last through the middle of next year.
"We are not subtracting accommodation. Test for raising rates is substantially higher [than tapering]. We want to see a very strong labor market," Powell said.
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By Anna Golubova
For Kitco News
