Fed official warns of ‘extreme’ market reaction unless debt ceiling is raised

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Two senior Federal Reserve officials warned on Monday that failure to raise the US debt ceiling would have dire consequences as Senate Republicans blocked a bill to increase the borrowing limit and avoid a government shutdown.

John Williams, President of the Federal Reserve Bank of New York, said the US central bank will not be able to mitigate the impact of a potential default on government debt. The Bipartisan Policy Center, a Washington think tank, estimated last week that the US government could default as soon as mid-October if the debt ceiling was not raised.

Williams warned reporters about the risk of investors becoming “too nervous” and thinking “I should get things off the ground,” which he said could lead to “an extreme kind of reaction in the markets.”

He said US Treasuries prices reflect a belief among investors that “quieter minds” will prevail in Congress, and are therefore not necessarily “an indicator of risk.”

Williams said, citing the collapse in the US Treasury market last year.

We saw it in March 2020, Treasury Market. . . It is the center of the global financial system, and if it is not able to function, it has repercussions.

Trading conditions in the $22 trillion US government debt market stalled at the start of the pandemic last year, as investors dumped the safest securities in a widespread rush for cash. The sudden wave of illiquidity forced immediate interventions from the Federal Reserve to stave off a more severe crisis.

Treasury Secretary Janet Yellen echoed Williams’ comments. In testimony due to be delivered to the Senate Banking Committee on Tuesday, she appealed to lawmakers to raise the debt limit in order to avoid what she said would be a “catastrophic event.” [the] Economie”.

Federal Reserve Governor Lyle Brainard also urged lawmakers on Monday to act. Congress knows what to do. . . It needs escalation. “She has responsibilities,” she said.

Brainard and Williams’ comments follow warnings from Federal Reserve Chairman Jay Powell last week of “severe damage” if the US defaults.

The Democratic-controlled House of Representatives approved a measure this month in a partisan vote to avoid a government shutdown on October 1 and an extension of the US debt limit until December next year.

But the bill failed to exceed the Senate’s 60-vote blocking limit on Monday night, as Republicans in the upper house of Congress voted to reject the measure. Democrats, who control the Senate at the lowest profit margins, are now under pressure to raise the borrowing limit themselves and avoid a government shutdown before the 12:01 am deadline on Friday.

Monday’s vote came after weeks of confrontation between Democrats – who wanted the Republican Party to sign off on raising the Treasury’s borrowing limit – and Republicans, who have steadfastly refused to agree to the measure and accused Joe Biden’s party of reckless public spending.

Republicans have voted to suspend the debt limit three times during Donald Trump’s administration, with the support of Democrats.

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Mitch McConnell, the Senate’s top Republican, said before Monday’s vote that he and his fellow Republicans would support “clean” legislation that funds the federal government to avoid a shutdown but would not sign off on Democrats’ efforts to tie the government’s financing of the debt ceiling.

“There is no opportunity for Republicans to help raise the line of credit for Democrats so they can immediately overcome socialist indulgences that will hurt families and help China,” McConnell said.

Democratic lawmakers are also seeking to resolve internal partisan divisions in order to pass Biden’s major $1.2 trillion infrastructure bill and $3.5 trillion social investment package in the coming weeks.

Democratic House Speaker Nancy Pelosi has scheduled a vote on the infrastructure bill on Thursday.

Pelosi said over the weekend that she won’t bring the infrastructure bill to the House floor until she’s sure she gets the votes to pass it. That possibility still seemed uncertain Monday, as several progressive and moderate lawmakers raised issues with the legislative package.

Progressives want assurances that the $3.5 trillion bill won’t be watered down in the Senate, while moderates say sweeping social investments need to be scaled back.

Biden fired an upbeat tone at the White House on Monday, telling reporters, “I think things are going to go well, and I think we’re going to get it done.” Asked what was “at stake” for his presidency amid congressional bickering this week, the president replied: “Victory is at stake.”

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