Fed ready to intervene if US finances become unstable due to debt ceiling

Minutes from the early May meeting showed Fed officials were concerned about the debt ceiling and ready to act to stabilize finances if necessary.

"Many officials mentioned the need to raise the debt ceiling in a timely manner to avoid the risk of serious disruption to the financial system and the economy ," said the minutes of the US Federal Reserve's meeting earlier this month. The minutes were just released on May 24.

Republican lawmakers and the Biden administration remain deadlocked over raising the debt ceiling. Negotiators have yet to agree on terms. Republicans want drastic spending cuts, while Democrats are pushing for revenue-raising measures.

In a press conference on May 3, Fed Chairman Jerome Powell affirmed: "People should not think that the Fed can protect the economy from the short-term and long-term impacts of a default."

Fed Chairman Jerome Powell at a press conference in March. Photo: Reuters — Fed Chairman Jerome Powell at a press conference in March. Photo: *Reuters*

However, the minutes also showed that the Fed will not sit idly by. "Many officials emphasized that the Fed should be ready to use liquidity tools, as well as prudent macro and micro policies, to minimize the risk of future financial instability," the minutes said.

More than a decade ago, Fed meetings also showed officials discussing a number of options. These included buying back government bonds to inject liquidity into the market, or even swapping delinquent bonds. In 2013, Powell called the measures “horrific,” but did not oppose their implementation. At that time, the debt ceiling battle even caused the US government to shut down. In 2011, the US Congress reached an agreement to raise the debt ceiling just two days before the US Treasury estimated the budget would run out.

On May 14, US Treasury Secretary Janet Yellen repeated her warning that the government would run out of money as early as June. At a Wall Street Journal event, she declined to say whether the department would prioritize payments on government bonds.

Earlier this month, Fed officials also discussed the functioning of the U.S. Treasury bond market, the world's largest bond market and a benchmark for global lending rates. "Some officials emphasized the importance of maintaining order in the U.S. government bond market and the ability of the authorities to address related issues," the minutes said.

Ha Thu (according to Bloomberg)

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