Negotiators edge closer to debt ceiling deal as Yellen extends deadline to 5 June

Unless Congress raises the debt ceiling, the US will run out of money to pay its bills by 5 June, the treasury secretary, Janet Yellen, said on Friday as Democratic and Republican negotiators struggled to reach a deal.

Failure to raise the debt celling could trigger a default that could wreak havoc on the economy and global markets. Yellen’s announcement gives negotiators a little more time to come to an agreement.

Patrick McHenry, one of the Republican negotiators, said they could meet the 5 June deadline.

“We’re not done, but we’re within the window of being able to perform this and we have to come to some really tough terms,” he told reporters.

Biden told reporters he thought the negotiators were very close to a deal.

“Things are looking good. I’m very optimistic,” the president said

Talks had been reported to be close to conclusion, as lawmakers sought to avoid a disastrous and unprecedented default. Wall Street and European shares rose as the White House and congressional Republicans worked on the final touches of a package to present to Congress.

Negotiators appeared to be nearing a deal to lift the limit for two years and cap spending, with agreement on funding for the Internal Revenue Service (IRS) and the military, Reuters quoted a US official as saying. But a White House official told the same outlet talks could easily slip into the weekend.

Lawmakers were placed on call after leaving Washington for the Memorial Day holiday.

Any agreement would have to win approval in the Republican-controlled House and the Democratic-led Senate before Biden could sign it into law – a process that could take more than a week.

“We have made progress,” the lead Republican negotiator, Garret Graves, told reporters. “I said two days ago, we had some progress that was made on some key issues, but I want to be clear, we continue to have major issues that we have not bridged the gap on, chief among them work requirements.”

The Republican House speaker, Kevin McCarthy, told reporters at the Capitol: “We know it’s crunch time. We’re not just trying to get an agreement, we’re trying to get something that’s worthy of the American people, that changes the trajectory.”

Democrats indicated Joe Biden was willing to consider spending cuts, including to planned extra funding for the IRS, a target of rightwing attacks, the Washington Post reported. Citing an anonymous official, Reuters said the deal would raise the ceiling for two years “while capping spending on everything but military and veterans”.

Yellen has warned for months that failing to raise the debt ceiling would be a “catastrophe”. In a letter to Congress released on Friday, she said the federal government was due to make more than $130bn in payments in the first few days of June, including payments to veterans and social Security and Medicare recipients, and leaving the treasury with “an extremely low level of resources”.

Raising the debt ceiling is usually a formality, if subject to political grandstanding. Republicans raised the ceiling without preconditions three times under Donald Trump, while adding to the debt with tax cuts and spending rises.

But McCarthy has only a five-seat majority and is beholden to the far right of his party, which is demanding stringent cuts.

On Thursday the White House press secretary, Karine Jean-Pierre, told reporters: “We’re fighting against Republicans’ extreme, devastating proposal that would slash … law enforcement, education, food assistance, all of these things are critical to American families who are just trying to make ends meet.”

Most analysts say a default would cast the global economy into market chaos and probable recession. This week, the US treasury cash balance dropped to $49.5bn, prompting Bloomberg TV to report: “There are 24 individuals on the Bloomberg Billionaires list who have more money than the treasury does right now.”

Reuters spoke to David Beers, a former head of sovereign ratings for Standard & Poor’s, which in 2011 reacted to a similar Republican-fueled debt standoff by downgrading its US credit rating, a move that stoked market instability.

“We thought that the political polarisation in the country was likely to endure, and secondly, we were also concerned about the rising trajectory of debt,” Beers said. “On both of our counts, our expectations, if anything … have been exceeded. I have no doubt in my mind that was the right call.”

Now, some on the Republican right, including Trump, the former president and current presidential frontrunner, say the party should let the US default if Biden refuses to cave.

The deputy treasury secretary, Wally Adeyemo, told CNN the government did not have the capability to “triage” payments if the debt ceiling is not raised. Adeyamo also said invoking the 14th amendment – which says public debt “shall not be questioned” – would not solve the problem.

Adeyemo said: “I don’t have any confidence that we have the ability to be able to do a type of prioritisation that will mean that all seniors, all veterans, all Americans get paid.”

Some House Democrats are upset at being kept out of negotiations, and at how Biden has fielded advisers rather than consistently getting involved himself. Democrats have also bemoaned how Republicans seem to be winning the messaging war, public polling showing support for spending cuts – and a ceiling raise.

Rosa DeLauro, from Connecticut, told Politico: “The scale of the cuts [demanded by Republicans] is staggering, which really the public knows very little about. The president should be out there.”

Biden was due to meet winning basketball teams at the White House on Friday, then travel to the presidential retreat at Camp David in Maryland.

Steven Horsford of Nevada, chair of the Congressional Black Caucus, said: “They need to use the power of the presidency … I need the American people to know that Democrats are here fighting, working, prepared to reach an agreement to avoid a default and only the White House, the president, can explain that in this moment.”

Biden has not been silent. On Thursday, at the White House, he said Republicans wanted “huge cuts” that would hurt ordinary Americans.

“It’s time for Congress to act, now,” he said, adding: “Under my administration, we’ve already cut the deficit by $1.7tn in our first three years. But Speaker McCarthy and I have a very different view of who should bear the burden of additional efforts to get our fiscal house in order.

“I don’t believe the whole burden should fall on the backs of middle-class and working-class Americans. My House Republican friends disagree.”

Reuters contributed reporting.