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UPDATE 1-Yellen says U.S. may exhaust cash by Oct 18 barring debt ceiling rise

(Recasts with focus on debt ceiling deadline; adds bylines)

By David Lawder and Susan Heavey

WASHINGTON, Sept 28 (Reuters) - U.S. Treasury Secretary Janet Yellen told lawmakers on Tuesday the government could run out of cash by Oct. 18 unless Congress acts to lift the federal debt limit in advance of the Treasury Department exhausting efforts to preserve resources.

"At that point, we expect Treasury would be left with very limited resources that would be depleted quickly," Yellen told lawmakers during a Senate Banking Committee hearing, echoing comments she made in a letter to lawmakers.

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"It is uncertain whether we could continue to meet all the nation’s commitments after that date," she said in the letter, one day after Senate Republicans rejected a measure to raise the nation's borrowing limit to pay for previously incurred government spending.

Yellen on Tuesday appeared along with Federal Reserve Chair Jerome Powell before the Senate Banking Committee to review the two agencies' actions to shield the economy from the coronavirus pandemic.

Asked repeatedly during the hearing about the approaching deadline for lifting the debt ceiling, Yellen said failing to do so would be a "disastrous" event that would trigger a "financial crisis and calamity."

Powell also urged Congress to raise the debt limit in time to avoid default.

The Treasury had already undertaken "extraordinary measures" to keep government funds flowing after the debt ceiling was reached over the summer. But those measures will run out in about 20 days, although the exact date could vary, Yellen said.

Yellen's warning was followed by a sell-off in some Treasury securities due to mature within the next month, with the yield on the 1-month Treasury bill rising to the highest level in months.

To now, investors have largely taken the view that the standoff in Congress over the matter will get resolved before the government reaches the threshold of default, although earlier in September investment bank Goldman Sachs described the current standoff as "the riskiest debt-limit deadline in a decade."

In prepared testimony before the hearing, Yellen said the United States should return to full employment next year despite headwinds from the coronavirus Delta variant. The recovery from a COVID-19 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," Yellen said.

"Still, I remain optimistic about the medium-term trajectory of our economy, and I expect we will return to full employment next year."

(Reporting by David Lawder, Editing by Nick Zieminski and Andrea Ricci)