Nearly five months before the US was projected to hit the debt ceiling, a small team inside the Treasury Department began alerting top officials to early effects already being felt in the US financial system.
The cost of insuring US debt, as measured by the price of credit-default swaps, was rising – a sign that investors were beginning to view US bonds and other securities as increasingly risky.
That early warning – and subsequent ones over the last month as the swaps pricing has surged – came out of the Treasury Department’s Markets Room and its eponymous team of nine financial analysts who are responsible for monitoring and analyzing global financial markets to inform the policy work of top Treasury Department and White House officials.
As the US rapidly approaches a potential default date in early June, top US officials are increasingly relying on the Markets Room to monitor for signs of disruption in the financial markets.
“In the same way that a doctor wants to understand the vital signs of a patient as they’re thinking about how to treat them, at Treasury keeping abreast of understanding the various ways in which the economy is healthy or unhealthy. And part of that is understanding the market,” Deputy Treasury Secretary Wally Adeyemo told CNN in an interview.
“So, we’re spending a lot of time with them better understanding what the costs are today, in order to make sure that we’re in a position to share that information with Congress, in order to prevent us from getting into a position where for the first time in our history, we’re unable to pay all of our obligations on time.”
That work begins each day before dawn, when staffers take turns waking up around 3:30 a.m. ET to compile data about overnight market developments and begin making calls to contacts working in European and Asian markets.
At around 7 a.m. ET, those data and insights land in the inboxes of top policymakers at the White House and Treasury Department.
At 9 a.m. ET, before the US markets open, Treasury Secretary Janet Yellen and her senior leadership team huddle virtually with the Markets Room and other key Treasury Department aides for a briefing on the state of the financial markets and issues to watch for that day.
“Almost every American is influenced by what’s happening around the globe and global markets either through your 401(k), or your attempt to borrow money for your small business or for your home. So, this team of individuals, every morning, provides us a briefing and an update on what’s happening around the world,” Adeyemo said.
In recent weeks, that daily briefing has heavily focused on reverberations of the debt limit standoff, from updates on auctions of Treasury bills to market reactions and commentary from market analysts and economists.
Much of the rest of the day is spent monitoring developments in the financial markets and fielding inquiries from top policymakers at Treasury and the White House for analysis on those developments.
And at the end of the day, the Markets Room also helps policymakers digest the biggest developments in the financial markets with another widely read one-page memo delivered after the US markets close and before the Asian markets open.
Beyond the Treasury Department, a White House spokesperson said the unit’s twice-daily memos are “a valuable asset” for officials at the National Economic Council and Council of Economic Advisers.
“Those offices also rely on the Markets Room’s real-time updates – either in memos or meetings – when more regular monitoring is warranted,” the spokesperson said.
Officials say the Markets Room is focused on monitoring the global economy’s recovery from the pandemic-induced recession, lingering inflation and the trajectory of the global economy.
Albert Lee, the Markets Room director, described the unit as an early warning system on the global financial system for top US policymakers.
In the early days of the coronavirus pandemic, the team was among the first to sound alarm bells inside the federal government about early shocks in pockets of the financial system and predicting rate cuts from the Federal Reserve.
The team also played a critical role during the banking crisis earlier this year, tracking the sharp selloff of stock and outflows of deposit at Silicon Valley Bank that ultimately triggered the bank’s collapse.
As the Treasury Department acted to address the second-largest bank failure in US history and prevent any spillover effects in the banking sector, top Treasury Department officials leaned on the Markets Room team to track the feedback of their policy actions.
“It was critically important for us to understand how markets were interpreting the actions that we took that made clear to the American people that your deposits were safe,” Adeyemo said. “We were monitoring signs of distress in the banking sector.”
With one week until the government can potentially no longer pay its bills, the US stock market is only just beginning to show signs of concern about a potential default and Treasury officials say the team is focused on tracking further reactions from the stock market as well as the Treasury securities market.
The stock market’s reaction has, up until now, been relatively muted – especially as compared to the 17% drop the S&P 500 suffered amid the 2011 debt ceiling crisis. But Treasury officials say volatility in the securities market is already affecting the federal government, raising the cost to borrow.
Yields on short-term Treasury securities have surged and recent auctions for securities are leaving a heftier price tag for the federal government, which Adeyemo said recently incurred $80 million in additional costs for a recent auction of Treasury bills.
“So, the cost of borrowing has already gotten more expensive when it comes to us borrowing in the short term for the US government,” Adeyemo said. “So as the debt limit manufactured crisis goes on, and costs go up for the government, it also means that costs will go up for the American people as well.”
Adeyemo declined to disclose what contingencies are being prepared should the US default. But when the US faced a similar standoff on the debt in 2011, Federal Reserve officials and Treasury Department officials quietly prepared a plan to prioritize payments on US debt and delay paying other government bills and obligations, like Social Security and payments to veterans, according to transcripts of a central bank meeting released in 2017.
“The most important thing for the American people, for our country, for our credibility, not only with our creditors, but with the American people is to pay all of our bills on time. That’s what our system is built to do,” Adeyemo said. “I’ve spent a good part of a decade working here at the Treasury Department. What I can tell you is that there’s no plan that would allow us to meet all of our commitments other than Congress, raising the debt limit.”
