Debt-limit standoff could force fed to revisit emergency playbook


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A Crisis-Management Playbook federal Reserve If the federal government can’t pay all of its bills because of a political impasse over raising the federal debt limit, officials created years ago can guide its response to this decline.

According to a transcript of the October 2013 conference call, options include buying Treasury securities if the Fed defaults on the open market and selling Fed-owned Treasuries to counter potentially severe stress in financial markets.


Among the officials who said those moves should not be ruled out were Jerome Powell —the current chairman of the central bank who was then the Fed governor—and Janet Yellen -The current Treasury Secretary, who was then the Fed’s Vice President.

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Powell called some of the measures “disgusting” and others called them “adverse” or “beyond the yellow” for two main reasons. First, they will directly penetrate the Fed’s institutional preference to avoid Financing government, often referred to as its independence from fiscal policy. Second, Fed officials are concerned that if such a contingency plan becomes public, elected officials may feel less urgency to raise the debt limit.

“These are decisions you really, really never want to make,” Powell said on the call. “The institutional risk will be huge. The economics of this are right, but you’ll be stepping into this difficult political world and seeing that you’re solving the problem.”

Yellen said, “I wouldn’t be too keen on doing them, but I wouldn’t say, ‘Never.’”

Others who shared that view include Boston Fed Chairman Eric Rosengren and then-San Francisco Fed Chairman John Williams, now chairman New York irrigated.

Congress Another political impasse is facing how to raise the debt limit before the Treasury Department is unable to pay bills for the next month or more. Lawmakers agreed to suspend the borrowing limit for two years in August 2019, and it took effect again last month at about $28.5 trillion. The Treasury has since relied on cash-conserving measures to manage payments.

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Similar impasse in the past has often been resolved after going down the wire, and some analysts say this has led to complacency that obscures the growing risks of a wrong decision this fall. One concern this time is a game of chicken in which the markets remain calm because they believe Congress will take action, and lawmakers do not act because they do not see any alarm in the markets. Top Republican have said they will not help Democrats raise the limit this year.

Powell declined to elaborate on the Fed’s contingency plans at a press conference last week, but he warned that the economy and financial markets would suffer serious damage if Congress waited too long to act. “It’s not something we should be considering,” he said. “No one should assume that the Fed or anyone else can completely protect the markets or the economy in the event of a failure.”

In 2011, Standard & Poor’s downgraded the US Triple-A credit rating for the first time, after Treasury came within days of being unable to pay certain benefits such as Social Security. In 2013, during another standoff, the US government shut down for 16 days until Congress passed a bill to fund the government and raise the debt limit.

Both times, Fed policymakers debated behind closed doors what they would do if gridlock led to the government defaulting on its loan payments or widespread financial-market volatility, according to tapes released with the usual five-year gap. A Fed spokesman declined to comment.

Powell, a Republican who oversaw debt-management policy as a top Treasury Department official in the early 1990s, made his return to public service in 2011 by warning against the consequences of default for Republicans who Used it as leverage to cut spending from President Barack. Obama. As an unpaid analyst at a Washington think tank called the Bipartisan Policy Center, Powell modeled government cash flows to produce a so-called “X debt,” which the Treasury would then have to pay bills. The money would run out because they were due.

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After resolving that impasse, Obama’s advisers recommended Powell’s nomination to the Fed’s board of governors, and he was confirmed in 2012. He became Fed chairman in 2018.

Last week, the think tank’s director of economic policy, Shai Akbas, released estimates that the “X date” would fall between October 15 and November 4. Friday could be a particularly difficult date for federal finances, he said, due to a large payment to a trust fund for veterans’ retirement benefits. Financial and economic risks may intensify from that point, he wrote.

Fed officials agreed in 2011 to a process for managing government payments that would allow the Treasury to pay off principal and interest on government debt before other obligations, tapes show. They were also prepared to tell banks that they could calculate defaulted treasuries for their regulatory capital buffer and that they would not penalize banks that suffered a fall in capital ratio due to abnormal cash demands from customers.

On October 16, 2013, then-Fed Chairman Ben Bernanke convened a conference call for officials to review possible options as the Treasury Department neared exhaustion of its emergency lending authority, according to a transcript of the call.

Fed staff economists outlined nine steps in which the central bank could consider managing the fallout from any missed payments.

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Officials broadly agreed on a number of measures, including lending against defaulted treasuries at their emergency lending window and accepting defaulted treasuries in a separate bond-buying incentive program—albeit at potentially lower market prices. As long as it was certain that the government would quickly complete the payment after the loan limit was exhausted.

Bernanke warned that the Fed would not be able to remove defaulted securities from the market “in any manner comprehensively given the size of the Treasury market.”

They also agreed on steps that could flood lending markets with cash, including very short-term loans made between financial institutions called repurchase agreements, which would also relieve pressure on money-market mutual funds. can.

Many officials expressed concern that financial markets could face severe disruption even before the Treasury stops paying all its bills. we The government failed to find enough buyers in the Treasury debt auction to replace the matured securities with new ones.

Powell pointed to the risk of the Treasury’s failure to sell short-term bills that would mature to a point where the government’s borrowing rights could expire. “The real risk is a failed auction – the loss of market access at any cost,” he said.

Powell was concerned that widely supported ideas were ineffective to address that problem. He later agreed that in an extreme crisis, the most unexpected measures should not be ruled out. “I don’t want to say today what I would and wouldn’t do if we were to really deal with a catastrophe over this,” he said.

Bernanke said that only Congress can completely resolve any impasse. “What we’re talking about … there are steps the Federal Reserve can take to reduce the potential impact of such a default, but obviously, it’s not a problem that we’re going to end up with anyway.” can,” he said.

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