A crisis management manual created years ago by Federal Reserve officials could guide their response this fall if the federal government cannot pay all of its bills due to a political stalemate over raising the limit. federal debt.
Options include the Fed buying defaulted Treasuries in the open market and selling Treasuries held by the Fed to counter potentially serious strains in financial markets, according to the transcript of an October 2013 conference call.
Among those officials who said these measures should not be ruled out were Jerome Powell – the current central bank chairman who was then Fed governor – and Janet Yellen – the current Treasury secretary who was then vice president. from the Fed.
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Powell called some measures “disgusting” and others “disgusting” or “beyond the bounds” for two main reasons. First, they would pierce the Fed’s institutional preference to avoid directly funding the government, what is often referred to as its independence from fiscal policy. Second, Fed officials feared that if such contingency planning became public, elected officials might feel less urgency about raising the debt limit.
“These are decisions you really, really never want to have to make,” Powell said on the call. “The institutional risk would be enormous. The economics are good, but you would step into this difficult political world and look like you made the problem go away.”
Yellen said: “I wouldn’t be eager to do them, but I wouldn’t say ‘never’.”
Others sharing this view were Boston Fed Chairman Eric Rosengren and San Francisco Fed Chairman John Williams, who is now New York Fed Chairman.
Congress faces yet another political stalemate on how to raise the debt ceiling before the Treasury Department is unable to pay the bills within the next month. Lawmakers agreed in August 2019 to suspend the borrowing limit for two years, and it came into effect again last month at around $ 28.5 trillion. Since then, the Treasury has relied on cash conservation measures to manage payments.
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Similar impasses in the past have often been resolved after scrutiny, and some analysts say this has spawned a complacency that masks the growing risks of an error in judgment this fall. One worry this time is a chicken game in which the markets remain placid because they assume Congress will act, and lawmakers do not act because they see no alarms in the markets. Top Republicans have said they won’t help Democrats increase the limit this year.
Powell refused at a press conference last week to elaborate on the Fed’s contingency plans, but warned of serious damage to the economy and financial markets if Congress waits too long to act. “It’s just not something we should be considering,” he said. “No one should assume that the Fed or anyone else can fully protect the markets or the economy in the event of a default.”
In 2011, Standard & Poor’s first downgraded America’s triple A credit rating, after the Treasury was unable to pay certain benefits such as Social Security a few days later. In 2013, in yet another standoff, the U.S. government closed its doors for 16 days until Congress passed a bill funding the government and raising the debt ceiling.
Both times, Fed policymakers debated behind closed doors what they would do if the deadlock resulted in the government defaulting on its debt payments or wider financial market instability, according to transcripts released with the usual five-year lag. A Fed spokeswoman declined to comment.
Powell, a Republican who oversaw debt management policy as a senior Treasury Department official in the early 1990s, returned to the civil service in 2011 on warning of the consequences of defaulting of payment for Republicans who used it as leverage to demand spending cuts from President Barack. Obama. As an unpaid analyst at a Washington think tank called the Bipartisan Policy Center, Powell modeled government cash flow to produce a so-called “Date X” after which the Treasury would run out of money. to pay bills as they fall due.
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Once that stalemate was resolved, Obama advisers recommended Powell’s appointment 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 Akabas, released projections indicating that the “date X” 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 owed to a trust fund for veterans retirement benefits. Financial and economic risks could accelerate from that point, he wrote.
Fed officials agreed in 2011 on a process for managing government payments that would allow the Treasury to prioritize paying principal and interest on government debt over other obligations, according to the transcripts. They were also prepared to tell banks that they could count defaulted treasury bills in their regulatory capital buffers and that they would not necessarily penalize banks facing declining capital ratios due to demands for bankruptcy. unusual cash flow from customers.
On October 16, 2013, then Fed Chairman Ben Bernanke called a conference call for officials to consider potential options as the Treasury Department neared the exhaustion of its borrowing power. emergency, according to a transcript of the call.
Fed staff economists had prepared a memo outlining nine steps the central bank could consider to deal with the fallout from any missed payments.
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Officials broadly agreed on several measures, including lending against defaulted T-bills in their emergency borrowing window and the acceptance of defaulted T-bills as part of a debt relief program. separate stimulus for the purchase of bonds, albeit at potentially reduced market prices, as long as it was certain that the government would quickly make full payments after the debt ceiling was lifted.
Bernanke warned that the Fed would not be able to withdraw the defaulted securities from the market “in any way given the size of the Treasury market.”
They also agreed to measures that could flood credit markets with liquidity, including making very short-term loans between financial institutions called repo agreements, which could also relieve pressure on money market mutual funds.
Many officials have expressed concern that financial markets could face serious disruption even before the Treasury stops paying all of its bills if the U.S. government fails to find enough buyers when it decides. an auction of Treasury debt to replace maturing securities with new ones.
Powell pointed to the risk that the Treasury will not sell short-term bills that mature at a time when the government’s borrowing power may be exhausted. “The real risk is that of a failed auction, loss of market access at any cost,” he said.
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Powell feared that the ideas with the widest support would be ineffective in solving this problem. He then agreed that in the event of an extreme crisis, the most unappetizing measures should not be ruled out. “I don’t want to say today what I would and wouldn’t do if we faced a disaster about this,” he said.
Bernanke said only Congress can completely resolve any deadlock. “What we’re talking about … are steps the Federal Reserve could take to marginally mitigate the potential effect of such a default, but obviously that’s not a problem we could all eliminate, by all. the means, “he said.