Apr 19, 2023 - Economy

The Fed's playbook for handling a debt ceiling crisis

A 2013 Federal Reserve meeting

A 2013 meeting of the Federal Reserve Board of governors, including chair Ben Bernanke and governor Jerome Powell. Photo: Andrew Harrer/Bloomberg via Getty Images

If the United States breaches the federal debt ceiling this summer, the Federal Reserve will be in the thick of it, whether it likes it or not — and a decade-old transcript gives us a glimpse of policy options available to the central bank.

Why it matters: A conference call from October 16, 2013, of the Fed's policy committee was recently made public. It provided a roadmap to what actions the Fed might take if a debt ceiling crisis roils the market for U.S. Treasury bonds.

  • In fact, the officials involved in part intended the records of that meeting to be used this way!
  • "The minutes of this discussion might be a potentially useful way to communicate some of our thinking to the markets in preparation for another episode, which, unfortunately, seems more likely than not to occur at some point," said then-chair Ben Bernanke.
  • Current chair Jerome Powell was a governor at the time, and an active participant in the meeting. That gives extra insight into how he views the options, even as he and other current officials have been guarded in their recent comments about what the Fed would do.

Between the lines: None of these options "solves" a debt ceiling standoff, which Fed officials — then and now — resolutely believe can only be accomplished by fiscal authorities. They would, however, cushion some of the damage to the economy and financial markets.

What they're saying: "The list of options the Fed considered in 2013 probably looks a lot like the options the Fed is thinking about today," said Bill English, who presented those options to policymakers at the meeting in his role as head of the Fed's monetary affairs division.

  • "The real question for policymakers will be which options they are comfortable using, given their assessment of the benefits and costs," English, now at the Yale School of Management, tells Axios.

Flashback: At the 2013 meeting, officials emphasized that the central bank would likely want to take steps to address market strains and support the economy, while not appearing to directly finance government spending — or meddle in a political dispute.

  • Several of the Fed's policy options described are uses of its long-established authorities, including purchases of Treasury securities at market values. In the current context, that could mean temporarily suspending its quantitative tightening program that is pulling liquidity from the bond market.
  • The Fed could use securities lending and the discount window — a source of emergency funds for banks — to help keep the financial system from melting down.
  • Other options included both engaging in repurchase agreements (if the crisis makes interest rates spike) or reverse repurchase agreements (if it causes a flight to safety and interest rates to fall), to keep rates close to the Fed's target.

Then there were the options that were considered more extreme.

  • The Fed could purchase Treasury securities that are in technical default, essentially enabling the U.S. government to keep financing its debt, even if the legality and creditworthiness of some securities is in question.
  • Or, it could swap the good Treasury securities on its books for the bad ones, essentially taking the bonds issued in excess of the debt limit off the open market.
  • These options were considered highly unappealing, as they would amount to the central bank doing an end-run around the elected branches of government.

Yes, but: After describing those options as "loathsome," Powell added that "I don't want to say today what I would and wouldn't do, if we have to actually deal with a catastrophe on this."

  • Bernanke quipped, "So you are willing to accept 'loathsome' under some certain circumstances?"
  • "Yes, under certain circumstances," Powell replied.

Go deeper: The full transcript of the meeting is here, if you enjoy 50-page transcripts of decade-old Fed meetings. The discussion of policy options starts on page 15.

Go deeper