(Reuters) – The Federal Reserve may not be able to shield the economy and financial markets from the effects of a U.S. debt default, the central bank’s chief said on Wednesday as he urged Congress to raise the country’s debt limit to avoid that catastrophic risk.
“It’s just very important that the debt ceiling be raised in a timely fashion so that the United States can pay its bills as and when they come due,” Fed Chair Jerome Powell said. “The failure to do that could result in severe damage to the economy and financial markets, and it’s just not something we should contemplate.”
Asked at a press conference following the Fed’s latest monetary policy meeting if the central bank is dusting off an emergency response to a U.S. default first devised about a decade ago, Powell said: “No one should assume the Fed or anyone else can fully protect the markets or the economy in the event of a failure.”
U.S. lawmakers in Congress are at loggerheads over the federal government’s $28.4 trillion debt ceiling.
The Senate could see a vote next week on raising Washington’s borrowing authority and keeping the government funded, the chamber’s No. 2 Democrat said on Wednesday, with a House Democrat warning Republican opposition could lead to a historic default on the nation’s debt.
Failing to raise or suspend it by Sept. 30 could trigger a third partial shutdown of the federal government in the past decade. Failure to do so by mid-October could lead to a far-more disastrous and first-ever U.S. debt default that could plunge the United States into recession and cause lasting damage to the economy.
Republicans oppose any increase as part of a pressure campaign to force Democrats to slim President Joe Biden’s proposed $3.5 trillion domestic spending package. Democrats say the debt ceiling debate has nothing to do with the Biden administration’s agenda.
Powell declined to say whether he had liaised with Treasury Department officials or lawmakers about contingency plans. The nation faced a similar debt ceiling scare in 2013, and at the time Fed policymakers – including Powell, then just a Fed board member – mapped out potential responses to counter stress in financial markets.
The blueprint covered a litany of actions the Fed could take to limit the fallout of any default, including prioritizing payments and expanding its asset purchases to include defaulted Treasuries.
The timing of the current stand off over the issue could not be worse for the Fed in that regard. At their two-day meeting ended Wednesday, officials agreed a slowdown in the current purchase pace of $120 billion a month of Treasuries and mortgage-backed securities “may soon be warranted” given ongoing improvements in the economy and progress toward its goals of price stability and maximum employment.
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