Powell says Fed can’t shield economy from a debt default

Powell says Fed can’t shield economy from a debt default
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(Feb 2) : Federal Reserve Chair Jerome Powell warned against any assumption that the central bank can rescue the economy if Congress fails to raise the federal debt ceiling — a move that could force the Treasury into a payments default.

“No one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner,” Powell said at a press conference in Washington Wednesday after the Fed’s latest policy meeting. “There’s only one way forward here, and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when due.”

Republicans and Democrats are at odds over raising the federal borrowing cap, which is on track to be breached later this year unless Congress acts. The Treasury is now deploying special accounting maneuvers after hitting the $31.4 trillion cap last month. It expects those measures can last at least until early June.

During debt-limit showdowns in the last decade, the Fed and Treasury discussed a mechanism to allow continued payments on US Treasury securities, with the government delaying other payments. Powell declined to offer a direct response on whether the Fed is currently looking at contingencies.

Separately, Powell played down any risk to the Fed’s quantitative-tightening program — its shrinking portfolio of Treasuries and mortgage bonds — posed by the debt-ceiling standoff.

“I don’t think there’s likely to be any important interaction between the two, because I believe Congress will wind up acting and as it will, and must, in the end,” the Fed chair said. He signaled Congress should boost the ceiling “in a way that doesn’t risk the progress we’re making against inflation and the economy and the financial sector.”

Powell said the Fed is aware that the Treasury’s cash holdings will ebb and flow in ways that will affect how much commercial banks have on deposit at the Fed and how much money market funds are putting in the Fed’s reverse repo facility.

“We of course will monitor money-market conditions carefully as the process moves on,” he said.

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