Yellen and Trump become central characters in debt-ceiling drama late Friday

Trump had previously advised Republicans not to shy away from a federal default in service of their demands of the Biden White House.

‘Hell, no — not a chance.’ — Garret Graves, a House Republican and debt-ceiling negotiator

In a blunt warning, Yellen said failure to act by the new date would “cause severe hardship to American families, harm our global leadership position and raise questions about our ability to defend our national-security interests.”

See: Trump on debt ceiling: GOP should force default if Democrats won’t make cuts

Anxious retirees were already making contingency plans for missed checks, with the next Social Security payments due next week.

The new Treasury deadline, a week from Monday, is four days later than previously estimated. Yellen said all “extraordinary measures” Treasury has resorted to would be exhausted.

The sudden announcement was likely to scramble talks between President Joe Biden and House Speaker Kevin McCarthy. They were narrowing on a two-year budget-slashing deal that would also extend the debt limit past the next presidential election. After frustrating rounds of closed-door talks, a compromise had appeared to be nearing on Friday.

But more time, even a few days from the earlier deadline, can be an eternity in Washington as the two sides engage in hard-edged deal making.

See: House Democrats say they have 213 votes for ‘discharge petition’ option in debt-limit standoff

Republicans have made some headway in their drive for steep spending cuts that Democrats oppose. However, the sides are particularly “dug in” over McCarthy’s demands for tougher work requirements on government food-stamp recipients that Democrats say is a nonstarter.

Earlier Friday, McCarthy said his Republican debt negotiators and the White House had hit “crunch” time, straining to wrap up an agreement with Biden as lawmakers broke for the long Memorial Day holiday weekend.

Any deal would need to be a political compromise, with support from both Democrats and Republicans to pass the divided Congress. Failure to lift the borrowing limit, now $31 trillion, to pay the nation’s incurred bills, would send shockwaves through the U.S. and global economy.

But many of the hard-right Trump-aligned Republicans in Congress have long been skeptical of Treasury’s projections, and they are pressing McCarthy to hold out.

“The deal’s within reach,” said Rep. Patrick McHenry, a North Carolina Republican, one of the McCarthy-deputized negotiators. “It just has to be agreed to.”

In optimistic comments earlier at the White House before Yellen’s letter was released, Biden gave a shoutout to one of this top negotiators saying she’s “putting together a deal, hopefully.”

He was referring to Office of Management and Budget Director Shalanda Young, who was in attendance at a White House salute to the Louisiana State University women’s national basketball champions. The University of Connecticut men’s-title winners were also celebrated at the White House on Friday.

Both Young and Garret Graves, the Republican debt-ceiling negotiating frontman through much of the process, are Louisianans.

While the contours of the deal have been taking shape to cut spending for 2024 and impose a 1% cap on spending growth for 2025, the two sides remain stuck on various provisions. The debt ceiling, now at $31 trillion, would be lifted for two years to pay the nation’s incurred bills.

A person familiar with the talks said the two sides were “dug in” on whether or not to agree to Republican demands to impose stiffer work requirements on people who receive government food stamps, cash assistance and health care aid.

House Democrats have called such requirements for healthcare and food aid a nonstarter, while, asked whether Republicans would relent on work requirements, Graves, fumed: “Hell no, not a chance.”

House Republicans had pushed the issue to the brink, displaying risky political bravado in leaving town for the Memorial Day holiday. Lawmakers are tentatively not expected back at work until Tuesday, but now their return is uncertain.

“The world is watching,” said International Monetary Fund Managing Director Kristalina Georgieva after meeting Friday with Yellen. “Let’s remember we are now in the 12th hour.”

See: ‘Don’t kiss your dollars goodbye just yet’: IMF chief on de-dollarization debate

Weeks of negotiations between Republicans and the White House have failed to produce a deal — in part because the Biden administration resisted negotiating with McCarthy over the debt limit, arguing that the country’s full faith and credit should not be used as leverage to extract partisan priorities and that only a “clean” bill to lift the limit was appropriate.

“We have to spend less than we spent last year. That is the starting point,” said McCarthy.

One idea is to set the top-line budget numbers but then add a “snapback” provision to enforce cuts if Congress is unable during its annual appropriations process to meet the new goals.

On work requirements for aid recipients, the White House is particularly resisting measures that could drive more people into poverty or take their health care, said the person familiar with the talks, who was granted anonymity to describe behind-closed-door discussions.

Over the Republican demand to rescind money for the Internal Revenue Service, it’s still an “open issue” whether the sides will compromise by allowing the funding to be pushed into other domestic programs, the person said.

In one potential development, Republicans may be easing their demand to boost defense spending beyond what Biden had proposed in his budget, instead offering to keep it at his proposed levels, according to another person familiar with the talks.

The teams are also eyeing a proposal to boost energy-transmission-line development from Sen. John Hickenlooper, a Colorado Democrat, to facilitate the buildout of an interregional power grid.

Meanwhile, McCarthy is feeling pressure from the House’s right flank not to give in to any deal, even if it means blowing past the Treasury deadline. McCarthy said Trump, the former president who is again a candidate for the Republican nomination in 2024, told him, “Make sure you get a good agreement.”

Watchful Democrats, though, are also pressing Biden. The top three House Democratic leaders led by Rep. Hakeem Jeffries spoke late Thursday with the White House.

McCarthy has promised lawmakers he will abide by the rule to post any bill for 72 hours before voting. The Democratic-held Senate has vowed to move quickly to send the package to Biden’s desk, right before next Thursday’s possible deadline.

Meanwhile, Fitch Ratings agency placed the U.S.’s AAA credit on “ratings watch negative,” warning of a possible downgrade.

The White House has continued to argue that deficits can be reduced by ending tax breaks for wealthier households and some corporations, but McCarthy said he told the president as early as their February meeting that raising revenue from tax hikes was off the table.

While Biden has ruled out, for now, invoking the 14th Amendment to raise the debt limit on his own, Democrats in the House announced they have all signed on to a legislative “discharge” process that would force a debt ceiling vote. But they need five Republicans to break with their party and tip the majority to set the plan forward.

See: White House says 14th Amendment ‘is not going to fix’ the debt-ceiling impasse

Also: Biden says he likely has authority to use 14th Amendment on debt ceiling, but it may be too late

They are all but certain to claw back some $30 billion in unspent COVID-19 funds now that the pandemic emergency has officially been lifted.

MarketWatch contributed.