What could the Fed do if we broke the debt ceiling?
On Monday morning, President Joe Biden again called on Congress to raise or suspend the debt ceiling.
Treasury Secretary Janet Yellen said something had to give because, in about two weeks, the Treasury won’t have enough money to pay all of its bills – and these are expenses Congress has already approved. .
So what could the Federal Reserve do if Congress fails to act and the federal government defaults? Turns out the Fed has a game plan for this because Congress has approached default before.
On October 16, 2013, Fed Governors, including Jerome Powell – who was not yet Chairman – met at their headquarters in Washington. Economist William English, a senior Fed adviser at the time, briefed them. He said, in Fed parlance: “The committee could, if it wished, engage in outright purchases or CUSIP swaps.”
Translation: The Fed could buy defaulted Treasuries – U.S. bonds for which the Treasury missed a payment because it ran out of money – or trade Treasuries that weren’t in default for those who were.
At the time, Powell called these options “disgusting.” English, who now teaches finance at Yale, understands why.
âObviously, these two stages would come in the middle of a political fight,â he said.
The Fed, however, is supposed to be politically independent. Other pages of its default rulebook include the ability for banks to use defaulted treasury bills as collateral for short-term loans. The idea is to keep financial markets calm, according to Kathryn Judge, a law professor at Columbia.
âAnd so part of it is just to reduce the degree of uncertainty, any effort to rush for money,â she said.
There is little the Fed can do, however. It’s a bit like refloating a leaking boat, said former Fed economist Ann Owen. âSolving a fundamental structural problem in the way we finance our government is not something the Fed can do,â Owen said.
In a hearing last week, President Powell told members of Congress, hey, don’t look at me to solve your problems.
“If there were to be a breach of our obligations, no one should assume that the Fed or anyone else can protect – completely protect – the American people from the consequences,” he said.
Fed officials won’t say if they have emergency meetings this time around to review that manual by default.