Political game contributes to the risk of default by the US government. How will the Fed respond?Understand in one article
News from the Financial Associated Press (Shanghai, editor Huang Junzhi),In recent years, the “debt ceiling” issue has become an important bargaining chip in the political game between the two parties in the U.S. Congress. This has not only severely affected the US economic growth and capital markets, but its spillover effects have also spread to the world through US debt, US dollars and financial markets, threatening global economic recovery and financial market stability.
In recent days, following the latest statement of “non-cooperation” by the Republican leader of the US Senate, McConnell, the risk of the federal government’s debt default has once again worried the market. US Treasury Secretary Janet Yellen (Janet Yellen) warned last month that if the debt ceiling debate is not resolved, there will be “disaster.”
Gregory Daco, chief U.S. economist at Oxford Economics, pointed out in the latest report that if the Treasury Department is unable to borrow money, the U.S. economy will soon fall into recession and a large number of jobs will be lost. He said that the international status of the United States has been damaged by the Capitol riots on January 6, and that if something like that happens again, it will be questioned again.
Against this background, economists generally believe that if Congress fails to raise the debt ceiling and the government cannot pay all the bills, the Fed will never sit idly by. Although Daco pointed out that the Fed’s actions are basically just a stopgap measure, not a permanent cure.
In order to understand the possible actions of the Fed, Fed observers are re-reading the minutes of a Fed meeting in October 2013, which is the last public discussion of the topic by Fed officials. At that time, the U.S. government was once locked down due to the failure of Congress to approve the appropriations bill.
Robert Perli, head of global policy at Cornerstone Macro, a market research firm and former Fed staff member, pointed out that the Fed has the following options to prevent financial markets from being affected by spillover effects and prevent excessive tightening of financial conditions, although these ideas are not smart.
First, the Fed can extend its $120 billion monthly asset purchase program. Perli said, “This will be the most obvious thing.” The Fed will also provide loans to banks through its emergency window loans. The other two tools will be to use its new permanent repurchase arrangement or reverse repurchase program to ensure broad market stability.
Second, according to the record of the October 2013 conference call, the Fed can also purchase defaulted U.S. Treasury bonds on the open market and sell U.S. Treasury bonds held by the Fed to deal with potential risks in the financial market.
Although Powell considers these measures “disgusting” and others find this method undesirable, neither he nor the current Treasury Secretary Yellen ruled out the possibility of adopting these measures. He said in the conference call that these measures will not be implemented as a last resort. Although correct from the perspective of economic principles, the political system is risky.
Perli also stated that among the many options,One thing that the Fed must not touch is to provide the Treasury with any funds needed for its normal operations.. It can bypass the debt ceiling, but it can also bypass Congress. The Fed will essentially become a fiscal authority.
Daco said, “This will have worrying consequences in terms of inflation dynamics, central bank independence, and debt sustainability. You are entering an emerging market world.’Made out of thin air’ currency will cause currency depreciation and accelerate inflation, and the auction will fail. May lead to a debt run. The dollar may also fall sharply.”
According to reports, McConnell sent a letter to President Biden on the 8th, stating that the Republican Party will not help the Democratic Party to raise the federal government debt ceiling again in the future. The Democratic Party can only use the budget adjustment process to solve the debt ceiling problem alone.
Just the day before, the Democratic and Republican parties of the United States Senate passed a bill to raise the federal government’s debt ceiling temporarily, temporarily raising the debt ceiling by about $480 billion to ensure that the Treasury Department can fulfill its payment obligations until December 3. Later, some Republican senators publicly criticized McConnell for “too fast” compromise with the Democrats on raising the federal government’s debt ceiling, believing that the large-scale fiscal expansion promoted by the Biden administration is detrimental to the U.S. economy.Return to Sohu to see more
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