Fed Can’t Protect US Economy From Debt Default, Powell Says

Jerome Powell, chairman of the US Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, DC, US, on Wednesday, May 3, 2023. The Federal Reserve raised interest rates by a quarter percentage point and hinted it may be the final move in the most aggressive tightening campaign since the 1980s as economic risks mount.

(Bloomberg) -- Federal Reserve Chair Jerome Powell said the failure to raise the US government debt limit would be unprecedented and have highly uncertain and negative effects on the economy.

“We'd be in unchartered territory and the consequences on the US economy could be highly uncertain and adverse,” Powell told reporters Wednesday after Fed officials completed their two-day policy meeting. “No one should assume that the Fed can protect the economy from the potential short and long-term effects of a failure to pay our bills on time.”

The US central bank lifted interest rates by a quarter point this week, bringing the target on its benchmark rate to a range of 5% to 5.25%. Powell said officials discussed the debt limit as a risk but that it did not influence their decision on rates.

Treasury Secretary Janet Yellen told US lawmakers this week that her department's ability to use special accounting maneuvers to stay within the federal debt limit could be exhausted as soon as the start of June. That leaves the government one month to reach an agreement that raises the borrowing limit and avoids a catastrophic default on US debt.

However, President Joe Biden and members of the House and Senate are scheduled to be in town at the same time for only one week between now and June 1. That short time-frame makes it less likely the two groups will be able to reach a long-term deal before the date Yellen identified, though she said the actual X-date could be a number of weeks later.

The two parties are at a political impasse. Speaker Kevin McCarthy pushed a Republican bill through the House last month that tied a debt-limit increase to sweeping spending cuts. But the bill cannot pass in the Democratic-controlled Senate. Meanwhile, Biden has said he's willing to discuss measures to reduce budget deficits, but those ought to be addressed separately from the debt-limit legislation.

Powell said the Fed does not get involved in negotiations. “We don't give advice to either aside,” Powell said. “We just would just point out that it's very important that this be done.”

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