Yellen told Reuters in an interview on the sidelines of a meeting of Group of Seven finance officials in Japan that she hoped to update the U.S. Congress within the next couple of weeks about when exactly Treasury would run out of funds to pay the government's bills.

The U.S. Treasury chief has called repeatedly for Congress to agree to raise the $31.4 trillion cap on federal borrowing to avert the "economic and financial catastrophe" that would ensue if the United States defaulted on its debts.

British finance minister Jeremy Hunt told reporters the standoff posed a "very serious" threat to the global economy.

"It would be absolutely devastating if America... was to have its GDP knocked off track by not reaching agreement," Hunt said on the sidelines of the G7 meetings.

Yellen said her estimate last week that the Treasury may not be able to meet payment obligations as early as June 1 was consistent with Friday's report from the Congressional Budget Office warning of a "significant risk" of default in the first two weeks of June.

President Joe Biden, a Democrat, insists Congress has a constitutional duty to raise the limit without conditions to fund previously approved spending. Republicans, who control the House of Representatives, want Biden to agree to sweeping budget cuts to secure their agreement.

Unlike most developed countries, the U.S. sets a ceiling on how much it can borrow. Because the government spends more than it takes in, lawmakers must periodically raise that cap.

POLARISATION

Yellen said the first major standoff over the debt ceiling since 2011 reflected continuing U.S. polarisation after the presidency of Donald Trump.

"It’s certainly not a positive for relationships and standing in the world and credibility," she said. "Maybe this time is more difficult, but I'm hopeful that...we will find a solution."

She said it was a positive sign that "pretty much everyone" at a meeting Biden hosted with congressional leaders on Tuesday agreed it would be unacceptable for the U.S. to default.

Biden, who is expected to reconvene the group early next week, still viewed attending the G7 summit starting on Friday in Hiroshima as a priority, Yellen said, although she noted that he had said he could cancel the trip if there was not sufficient progress on ending the impasse.

Despite the debt ceiling fight, Yellen said she remained convinced that the Biden administration had re-established U.S. leadership in the world and other G7 leaders were grateful they had turned "the dial 180 degrees relative to the Trump administration".

She argued there were no good options for prioritising payments in the event of a default, but conceded it would be technically possible to process them one day at a time as revenue came in, resulting in a sort of rolling default. Principal and interest payments are handled separately.

In a report this week, the Bipartisan Policy Center said some Treasury officials had viewed the approach as the most plausible and least harmful during the 2011 standoff.

"We shouldn’t be talking about that," Yellen said. "We should be talking about raising the debt ceiling. Every plan has serious downsides.”