Fed Chair Powell says he’s powerless to protect the economy if Congress lets the US default on its debt

Jerome Powell hearing
Fed Chair Jerome Powell. Sarah Silbiger/Getty Images
  • Nobody should assume the Fed can save the US economy if Congress fails to raise the debt limit, Jerome Powell said.
  • If the ceiling isn’t raised, the US could default on its debt and enter a self-inflicted recession.
  • A debt-ceiling downturn is “just not something we can or should contemplate,” the Fed chair said.
  • See more stories on Insider’s business page.

The Federal Reserve won’t come to the economy’s rescue if the US defaults on its debt, central bank chair Jerome Powell said Wednesday.

Congress is, once again, coming dangerously close to a debt-ceiling crisis. Lawmakers have until mid-October to either raise or suspend the borrowing limit or allow the US to default on its debt. The latter outcome would freeze spending on several critical public programs, spark massive job losses, throw financial markets into chaos, and likely plunge the US into a self-inflicted recession.

In other words, defaulting on government debt is “just not something we can or should contemplate,” Powell told reporters in a press conference. Failure to raise the ceiling could spark “severe damage to the economy,” and the ball is solely in lawmakers’ hands, the Fed chair added.

“I think we can agree the United States shouldn’t default on any of its obligations and should pay them when due,” he said. “No one should assume that the Fed or anyone else can protect the markets or the economy in the event of a failure.”

Debt scares aren’t anything new to those on Capitol Hill. The ceiling has already been suspended or lifted 57 times in the last five decades. But the 117th Congress is on track to be the first to break the threshold.

Republicans have been adamant that raising the ceiling is Democrats’ responsibility alone. Senate Minority Leader Mitch McConnell reiterated his opposition to the effort on Wednesday, saying Democrats shouldn’t “play Russian roulette with our economy.”

On the other side of the aisle, Democrats are pinning the blame on Republicans’ past actions. Lifting the limit only allows the government to cover its past spending. After the GOP and President Donald Trump added roughly $US8 ($AU11) trillion in debt through tax cuts and stimulus, Republicans “are threatening not to pay the bills,” Senate Majority Leader Chuck Schumer tweeted Wednesday.

Schumer and House Speaker Nancy Pelosi revealed on Monday a measure that would suspend the limit through December. Yet fervent GOP opposition, a fragile Democratic majority in the Senate, and a looming deadline stand in the way of its passage.

What’s at stake if the US defaults

As lawmakers barrel toward the threshold, experts have painted a dismal picture of what a US default would look like. The White House told state and local governments on Friday that failing to lift the ceiling would swiftly freeze funding for programs including Medicaid, the Children’s Health Insurance Program, and FEMA disaster relief. The resulting recession would prompt “economic catastrophe,” Treasury Secretary Janet Yellen added Monday.

Outside the White House, assessments have been even bleaker. Failure to lift or suspend the ceiling would power a downturn reminiscent of the 2008 financial crisis, Moody’s Analytics economists led by Mark Zandi said Tuesday. The US would shed nearly 6 million jobs, and the unemployment rate would leap to 9% from 5.2%.

The resulting market crash would also cripple everyday Americans. Stock prices would tumble more than 30% before recovering, the team said. Losses from the selloff would total $US15 ($AU21) trillion in household wealth, according to Moody’s.

Such a slump would also come as the country remains mired in a COVID-slammed economy. The Fed held its ultra-accommodative policy intact on Wednesday, leaving key supports in place as 8.4 million Americans remain unemployed. Powell hinted that a pullback could start in November, but even then, it will likely take years for Fed policy to fully return to pre-crisis norms.