Yellen wants debt limit hike via regular order; Dems leave it out of reconciliation, setting up fall showdown

Treasury Secretary Janet Yellen on Monday urged Congress to pass a debt ceiling increase through regular order with bipartisan votes, as Senate Democrats left any such language out of their Senate budget resolution released just a few minutes later. 

Senate Minority Leader Mitch McConnell, R-Ky., meanwhile is swearing that Republicans will under no circumstances provide the votes to raise the debt ceiling, setting up a potential high-stakes showdown this fall. 

"In recent years Congress has addressed the debt limit through regular order, with broad bipartisan support. In fact, during the last administration, Democrats and Republicans came together to do their duty three times," Yellen wrote Monday. "Congress should do so again now by increasing or suspending the debt limit on a bipartisan basis."

McConnell has been urging his fellow Republicans to say no to any debt ceiling legislation. Instead, he says Democrats should use the budget reconciliation process to bypass the filibuster and pass a debt limit increase with just their 50 Senate votes. 

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Democrats are the ones currently driving trillions and trillions of dollars in federal spending, McConnell said, so Republicans should not "give them political cover for the partisan debt bomb they'll go right on to detonate with zero input from us."

But Yellen said in her Monday statement that McConnell's characterization is inaccurate.

"[I]ncreasing or suspending the debt limit does not increase government spending, nor does it authorize spending for future budget proposals," she said. "[I]t simply allows Treasury to pay for previously enacted expenditures. Failure to meet those obligations would cause irreparable harm to the U.S. economy and the livelihoods of all Americans."

Yellen's statement was the first time the Biden administration weighed in on how Congress should increase the debt ceiling. White House press secretary Jen Psaki recently declined to give the president's opinion on what the legislature should do. She emphasized that Congress must increase the debt limit somehow to avoid a default that would be catastrophic for the economy but left the details up to congressional leaders.

It it still technically possible for Democrats to raise the debt ceiling under budget reconciliation even though it's not included in their current legislative vehicle. It could be added later or even passed separately – a parliamentarian ruling from earlier this year would allow Democrats to revisit and edit past reconciliation vehicles, Senate Majority Leader Chuck Schumer, D-N.Y., said this spring. 

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A 2019 suspension of the debt limit expired on July 31, triggering Yellen and the Treasury Department to take "extraordinary" measures to stretch out the government's finances. But the Congressional Budget Office estimated late last month that the government will run out of money by October or November. 

The U.S. has never defaulted on its debt before, but came close in 2011, when House Republicans refused to pass a debt ceiling increase, prompting rating agency Standard and Poor's to downgrade the U.S. debt rating one notch.

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The government temporarily defaulting on some of its obligations could have serious negative economic implications. Interest rates would likely spike, and demand for Treasuries would drop; even the threat of a default can cause borrowing costs to increase.

FOX Business' Megan Henney and Chad Pergram contributed to this report.