And default US Treasury debt would mean a leap into the void for the Federal Reserve’s ability to carry out monetary policy that allows it to achieve its employment and inflation goals.
US government debt is important for the central bank to set its short-term interest rate target, so anything destabilizing the Treasury bond market could disrupt those mechanisms.
The Fed uses Treasuries for a number of key functions. It involves borrowing cash from money market funds in collateralized transactions with government bonds to set a base for short-term interest rates through its reverse repo mechanism. federal Reserve You can also borrow or buy Treasury bonds to keep the federal funds rate at a set level.
secretary of tesoro Janet Yellen has said that by early June the government may run out of money to pay all its bills if the debt ceiling is not raised. Tense talks are underway between the White House and Republican lawmakers in Congress, with signs that they are close to a deal to avoid a default that could wreak havoc on the global financial system.
For the Federal Reserve, the possibility of default means uncertainty not only because of the debilitating effects it is likely to have on the economy, but also in the way it handles the day-to-day ins and outs of monetary policy: whether money Will market funds accept a higher price? Impaired Treasury security as collateral? Would the Federal Reserve be willing to borrow or buy a distressed Treasury security?
central bank officials, starting with the president irrigated Jerome Powell, has insisted that raising the debt limit to $31.4 trillion is the only solution and has refrained from giving details about what the Fed might do.
The association’s president said last week, “I’m not going to speculate about what might or might happen (…) I don’t think it’s useful.” federal Reserve of New York, John Williams.
Past for example
this is not the first experience of federal Reserve With credit limit policy. There is a manual from previous conflicts in 2011 and 2013 that would probably be the basis for responding in case it ended in “default” rather than an agreement to avoid it as in the past.
minutes of the meeting irrigated October 2013 indicated that authorities expected they would not require any changes to procedures and that they would deal with market-rate prices, leaving some room to intervene to stabilize them if necessary.
now there are also some differences that give irrigated Some scope, at least in terms of how its market operations might work, largely due to its massive balance sheet. The Fed currently owns $5.2 trillion in Treasury debt, and most of it will be fine at the onset of default.
“Even if there is a default, say in July or June or something like that, there is more than enough guarantee that they will not be in default,” so federal Reserve It can still transact with money market funds to keep its overnight repo mechanism operational, said Joseph Wang, chief investment officer of monetary macro.
He said he expected to accept bonds from money market funds. tesoro Impaired if necessary because ultimately these companies are lending to the Federal Reserve anyway, and there is little chance that they won’t get their money back.
Wang also hopes the central bank America Accept written-off Treasuries as part of your repo line as well as any discretionary trades you may make, as failure to do so could lead to a bigger problem.
“It would seem strange that the Federal Reserve itself would want to cause trouble, given that its mandate includes financial stability,” he said.
Nevertheless, pricing of securities can be a significant problem the longer defaults persist.
Derek Tang, analyst at forecast firm LH Mayer said that irrigated It has been vague about contingencies perhaps because it wants elected leaders to address the problem and not view the central bank as a safety valve.
And this is where Treasury bond price declines complicate operations. irrigated, Market value can be difficult to determine, but if the central bank decides to accept such bonds at a higher price than the market is offering, the Fed can be seen as “an originator in this play”. Maybe, Tang said.
Apart from keeping the wheels of monetary policy turning, the central bank may have to grapple with other questions on whether to intervene with bond purchases to stabilize markets, as it did in March 2020 during the COVID-19 pandemic. some officers of irrigated He has talked in recent months about separating this power from asset purchases aimed at stimulating the economy.