Federal Reserve Chairman Jerome Powell has warned of “highly uncertain and adverse” economic consequences if the US defaults on its debt obligations. “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,” he further cautioned.
Fed Chair Jerome Powell’s Debt Default Warning
Federal Reserve Chair Jerome Powell has warned of the potential consequences of a US debt default. “We’d be in uncharted territory and the consequences on the US economy could be highly uncertain and adverse,” he said this week, adding:
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.
Powell’s warning came after the Federal Reserve increased its key interest rates by 25 basis points this week — its 10th hike in 14 months. The increase takes the Fed Funds Rate to a target range of 5%-5.25%, the highest since August 2007.
The Federal Reserve chairman noted that Fed officials discussed the potential risk of the US debt limit during their latest Federal Open Market Committee (FOMC) meeting, but the topic did not have an impact on their rate hike decision.
Many people have warned of the dire consequences of a US debt default. Treasury Secretary Janet Yellen, for example, cautioned that it “would produce an economic and financial catastrophe.” The president of the European Central Bank (ECB), Christine Lagarde, said it would be a “major disaster” if the US were to default on its debt obligations.
As Democrats and Republicans remain deadlocked over raising the debt ceiling, Yellen revealed this week that the Treasury Department will not be able to pay all of the government’s debt obligations “as early as June 1if Congress does not raise or suspend the debt limit before that time.”
Powell stressed that the Federal Reserve does not get involved in negotiations on this topic, stating:
We don’t give advice to either aside … We just would just point out that it’s very important that this be done.
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