Fed has a ‘loathsome’ plan in case of US debt default

23rd Day of US govt shutdown today

san francisco — Should political deadlock in Washington again bring the world’s biggest economy to the brink of a debt default, the US central bank has a playbook that includes options one policymaker once labelled “loathsome”, but, perhaps, necessary.

The policymaker was Jerome Powell, now the Federal Reserve chairman and a Fed governor in October 2013 when a political debate over federal spending brought the country to the verge of reneging on trillions of dollars of financial obligations.

To prepare for that possibility, two Fed staffers penned a memo outlining nine actions the Fed could take if failure to raise the US debt ceiling triggered a debt default.

Fed chairman Ben Bernanke then convened a videoconference with fellow policymakers, a transcript of which was among a trove of Fed documents from that year published on Friday, the 21st day of a partial government shutdown that has revived memories of 2013, when government funding lapsed for more than two weeks amid a protracted debt crisis.

Options included several that policymakers readily supported, including expanding ongoing bond purchases and providing emergency lending. Two were far more controversial: purchasing Treasuries with delayed coupons in an effort to take them out of the market, and swapping Treasuries that weren’t in default for those that were. Those actions, Powell warned, would carry huge “institutional risk”.

Several policymakers, including the future Fed chief Janet Yellen and current New York Fed chief John Williams, argued the fallout of a default would be so terrible that the Fed would need to take all possible action, however “repugnant”, in the words of Boston Fed president Eric Rosengren. Powell ultimately agreed options should remain on the table. —