Delta variant slowing US recovery, Yellen and Powell warn

Treasury Secretary says department will hit debt limit in mid-October

US Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell testify during a US Senate committee hearing. AFP

US Treasury Secretary Janet Yellen and Fed Chair Jerome Powell have warned senators that the Covid-19 Delta variant is slowing the US economic recovery despite its "unprecedented" reopening.

In prepared remarks to a Senate Banking Committee hearing, Ms Yellen said the recovery from the pandemic-induced recession remains "fragile but rapid."

"While our economy continues to expand and recapture a substantial share of the jobs lost during 2020, significant challenges from the Delta variant continue to suppress the speed of the recovery and present substantial barriers to a vibrant economy," Ms Yellen said.

Mr Powell added: "The Delta variant has led to a surge in cases, causing significant human suffering and slowing the economic recovery."

Employment growth noticeably slowed down in August as the unemployment rate hit 5.2 per cent. Caregiving needs and continuing fears of the coronavirus appear to be weighing down job gains, Mr Powell noted.

"This figure understates the shortfall in employment", he said, adding at the end of his opening remarks that the US economy remains a long way from achieving maximum employment.

An increase in consumer prices has been "greater and more enduring than anticipated", but Mr Powell remains confident inflation will eventually subside.

Containing the spread of the virus and getting more Americans fully vaccinated would help mitigate inflation and unemployment rates.

US Treasury to hit debt limit mid-October, Yellen warns

Ms Yellen also repeated that a debt default triggered by Congress' failure to lift the federal debt limit would impair the full faith and credit of the United States "and our country would likely face a financial crisis and economic recession."

Ms Yellen warned the Treasury Department will likely exhaust all of its “extraordinary measures” to avoid an unprecedented default on the government’s obligations by October 18.

In a letter to lawmakers, she said, “We now expect that Treasury is likely to exhaust its extraordinary measures if Congress has not acted to raise or suspend the debt limit by October 18. At that point, we expect Treasury would be left with very limited resources that would be depleted quickly.”

Yellen said it was uncertain whether Treasury could meet all of the nation’s commitments after that date.

She said she still hoped the debt limit could be raised on a bipartisan basis. US Senate Republicans blocked a debt limit and government funding measure late on Monday.

"Senators, the debt ceiling has been raised or suspended 78 times since 1960, almost always on a bipartisan basis," Ms Yellen said before the committee on Tuesday.

"My hope is that we can work together to do so again and to build a stronger American economy for future generations."

Mr Powell, who suggested the Federal Reserve could scale back its asset-purchasing programme by November, has also endorsed raising the debt ceiling.

If the US Congress does not address the debt limit, the US would default for the first time in its history.

It would be a "self-inflicted wound of enormous proportions, Ms Yellen said.