Fed has ‘no magic wand’ in default

The Federal Reserve has no magic wand to overcome the consequences of a US default on its debt © AFP/File Karen Bleier

AFP

WASHINGTON (AFP) – The Federal Reserve has no magic wand to overcome the consequences of a US default on its debt, a senior Fed official said Thursday.

With politicians still deadlocked over a plan to raise the country’s borrowing ceiling before the make-or-break date of August 2, the head of the central bank’s San Francisco regional branch, John Williams, stressed the urgent need to break the impasse.

“Even as the nation must come to terms with its fiscal problems, a federal default must be avoided,” he said in a speech in Salt Lake City.

“Make no mistake — the Federal Reserve doesn’t have a magic wand that will allow the economy to get through a crisis of this magnitude unscathed.”

Williams highlighted the core problem of the crisis that Republicans and Democrats are battling over, how to address the country’s chronic massive budget shortfalls.

“There is no question that we are currently on an unsustainable long-run path of federal fiscal deficits,” he said.

“It is essential that budget deficits over the next decade be brought under control. The costs of not doing so are enormous.”

But he said that allowing the country to default on its debt — which could take place if the already maxed-out $14.3 trillion debt ceiling isn’t raised within days — should not be a consequence.

“Fortunately, the key players in Washington seem to understand the risks, which may be why financial markets have stayed reasonably calm — at least so far,” he added.

The Treasury says that on August 2 its overall spending commitments will surpass its receipts and that, without additional borrowing power, it would have to renege on expected payments, including possibly debt service.

© AFP — Published at Activist Post with license