As the debt-ceiling standoff between House Republicans and the White House continues, the Federal Reserve warns of “significant risks to the financial system and the broader economy.”
- According to minutes from a Fed closed-door meeting, officials are concerned that a prolonged debt-ceiling standoff could adversely affect the broader economy.
- An extended debate over whether or not to raise the debt ceiling could result in added strain on U.S. Treasury bonds.
- During the meeting, officials discussed “the importance of the orderly functioning of the market for U.S. Treasury securities” and “the importance of the appropriate authorities continuing to address issues related to the resilience of the market.”
- As a potential solution, Fed officials discussed the possibility of the Fed’s liquid facilities alleviating pressure in certain areas but also “noted the challenges of addressing potential disruptions in U.S. core market functioning.”
Why it’s news
House Republicans and the White House have been in a standoff regarding raising the debt ceiling since January. After reaching the debt limit, U.S. Treasury Secretary Janet Yellen implemented what the Treasury calls “extraordinary measures” to prevent the government from defaulting or reaching a shutdown.
In exchange for raising the debt ceiling, Republicans are asking for spending cuts in the overall budget. The White House has said it will not negotiate—and therefore not offer those cuts. If no agreement is reached, the U.S. government could default on its debt for the first time in the country’s history.
Republicans argue that the president’s inability to negotiate only means that not only will there be more room for debt, but without spending cuts it will only lead to more spending, leading to more debt, and the cycle will continue.
With the Treasury’s accounting maneuvers keeping the government afloat, officials should have until about June to reach an agreement. The Treasury’s “extraordinary measures” include tactics such as pausing the sale of some Treasury securities and changing investments in certain funds.
These maneuvers will only keep the government moving for a limited time. Once those means are exhausted, the Treasury will have to start spending available cash. That cash could last the Treasury until about October. After that point, the U.S. would go into default.
At that point, U.S. military and federal employees would not be paid, Social Security payments would stop, food assistance benefits would cease, and Veterans would not receive compensation or pension payments.