Nearly five months before the US debt ceiling was forecast to hit, a small team at the Treasury Department began to warn senior officials of the early impact that is already being felt in the US financial system.
The cost of insuring US debt, as measured by the price of credit default swaps, has risen, a sign that investors have begun to view US bonds and other securities as increasingly risky.
This early warning – and follow-up warnings for the past month when swap prices have soared – comes from the Treasury Department’s Markets Division and its eponymous team of nine financial analysts who are responsible for monitoring and analyzing global financial markets to inform policy makers. faces of the Treasury Department and the White House.
As the US rapidly approaches a potential default date in early June, senior US officials are increasingly relying on the Markets Room to monitor for signs of disruption in financial markets.
“Just like a doctor wants to understand a patient’s vital signs when they think about how to treat them, the Treasury Department is always aware of the different ways the economy is healthy or unhealthy. Part of that is understanding the market,” Deputy Treasury Secretary Wally Adeyemo said in an interview with CNN.
“So we’re spending a lot of time with them to better understand what the costs are today, to make sure we’re able to share this information with Congress to prevent us from getting caught. where, for the first time in our history, we cannot pay off all of our obligations on time.”
This work begins each day before dawn, when employees take turns waking up around 3:30 AM ET to collect data on overnight market events and start calling contacts in the European and Asian markets.
At about 7 a.m. ET, these data and ideas hit the inboxes of top politicians in the White House and the Treasury Department.
At 9 a.m. ET, ahead of the opening of US markets, Treasury Secretary Janet Yellen and her senior leadership team met virtually with the Markets Department and other key Treasury Department aides for a briefing on the state of financial markets and issues to watch out for in this day.
“Nearly every American is affected by what is happening in the world and in global markets, either through your 401(k) form or through your attempt to borrow money for your small business or for your home. So, this group of people gives us a briefing every morning and an update on what’s going on around the world,” Adeyemo said.
In recent weeks, this daily briefing has been heavily focused on echoes of the debt-limit standoff, from updates to T-bills auctions to market reactions and commentary from market analysts and economists.
Most of the rest of the day is devoted to monitoring developments in the financial markets and sending in requests from top politicians in the Treasury and the White House to analyze these developments.
Finally, the Markets Room also helps policy makers analyze the most important developments in the financial markets with another widely read one-page note published after the US markets close and before the Asian markets open.
In addition to the Treasury Department, a White House spokesman said the division’s daily memos are a “valuable asset” to officials at the National Economic Council and the Council of Economic Advisers.
“These offices also rely on real-time Markets Room updates — either in memos or meetings — when more regular monitoring is needed,” the spokesperson said.
Officials say the Markets Room is focused on monitoring the global economic recovery from the pandemic-driven recession, lingering inflation and the trajectory of the global economy.
Albert Lee, director of the Markets Room, described the division as an early warning system for the global financial system for top US policymakers.
In the early days of the coronavirus pandemic, the team was one of the first to sound the alarm within the federal government about early turmoil in the pockets of the financial system and forecasting rate cuts by the Federal Reserve.
The team also played a pivotal role during the banking crisis earlier this year, tracking a stock sell-off and deposit run-off at Silicon Valley Bank that ultimately triggered the bank’s collapse.
As the Treasury Department took action to address the second-biggest banking failure in US history and prevent any spillovers in the banking sector, senior Treasury Department officials reached out to the Markets Room team to monitor feedback on their policy actions.
“It was critical for us to understand how the markets would interpret the actions we took that made it clear to the American people that your deposits are safe,” Adeyemo said. “We have been monitoring for signs of distress in the banking sector.”
With a week before the government is potentially no longer able to pay its bills, the US stock market is just beginning to show signs of concern over a potential default, and Treasury officials say the team is focused on monitoring further reaction from the stock market, as well as the Treasury securities market.
The stock market has been relatively subdued so far, especially compared to the 17% drop in the S&P 500 during the 2011 debt ceiling crisis. But Treasury officials say the volatility in the stock market is already affecting the federal government, driving up borrowing costs.
Yields on short-term Treasury securities have risen sharply, with recent securities auctions leaving a higher price tag for the federal government, which Adeyemo said recently incurred an additional $80 million in spending on a recent Treasury bill auction.
“So, the cost of borrowing has already become more expensive when it comes to short-term loans to the US government,” Adeyemo said. “So as the debt cap crisis continues and government spending rises, it also means that spending will rise for the American people as well.”
Adeyemo declined to disclose what contingencies are being prepared for a US default. But when the US faced a similar debt standoff in 2011, Federal Reserve and Treasury officials quietly prepared a plan to prioritize US debt payments and defer other government bills and obligations, such as Social Security and veterans’ payments. Transcripts of a central bank meeting published in 2017.
“The most important thing for the American people, for our country, for our trust, not only in our creditors, but in the American people, is to pay all our bills on time. This is what our system is designed for,” Adeyemo said. “I have spent a good part of a decade working here at the Treasury Department. What I can tell you is that there is no plan that will allow us to meet all of our obligations, except for Congress by raising the debt limit.”