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Powell Warns Fed Cannot Shield Economy from Debt Limit Default

On Wednesday, Fed Chair Jerome Powell stated that the U.S. Federal Reserve is unlikely to protect the U.S. economy from damages caused by a failure to raise the federal debt ceiling. He emphasized that the government should always be able to pay all of its bills.

Jerome Powell
Jerome Powell

Debt Ceiling Resolution Is Congress' Responsibility

Powell highlighted that resolving the debt ceiling standoff between Republicans and Democrats matters for Congress and the Biden administration. The Fed's role is not to advise either side but to stress the importance of resolving the issue.

U.S. Default's Diverse Consequences

Powell said a U.S. default would be unprecedented and have "highly uncertain" and "quite diverse" consequences for the U.S. economy, but he declined to enumerate them. He insisted that discussions about the U.S. not paying its bills should not be happening.

Limitations of the Fed's Protective Role

Powell cautioned against assuming that the Fed can protect the economy, the financial system, and the U.S.'s global reputation from the damage that a debt limit default might inflict.

Yellen's Warning and Biden's Response

U.S. Treasury Secretary Janet Yellen warned that a default on U.S. payment obligations due to insufficient cash could come as early as June 1, which prompted President Joe Biden to call for a May 9 meeting with top Congressional leaders. It remains unclear whether negotiations over Republicans' spending cuts demands will occur or if the focus will be on a "clean" debt ceiling increase. Yellen also warned that a debt ceiling default would cause "severe hardship" to American families and harm the U.S. global leadership position.