Federal Reserve Chair Jerome Powell has issued a warning about the possible consequences of a U.S. debt default. The economic impact could be highly uncertain and adverse, he warned, adding that nobody should assume that the Fed could protect the economy from the short and long-term effects of failing to pay bills on time. Powell’s warning came after the Federal Reserve raised its key interest rates by 25 basis points this week, marking the 10th hike in 14 months. The increase takes the Fed Funds Rate to a target range of between 5% and 5.25%, the highest since August 2007.
Debt Limit Risk
The chairman of the Federal Reserve noted that the potential risk of the U.S. debt limit was discussed during their latest Federal Open Market Committee (FOMC) meeting. The topic, however, did not have any impact on their rate hike decision. Many people have warned about the dire consequences of a U.S. debt default. Treasury Secretary Janet Yellen cautioned that it could “produce an economic and financial catastrophe,” while the president of the European Central Bank (ECB), Christine Lagarde, warned it would be a “major disaster” if the U.S. defaulted on its debt obligations.
Deadlocked Over Debt Ceiling
As Democrats and Republicans remain deadlocked over raising the debt ceiling, Yellen revealed that the Treasury Department will not be able to pay all of the government’s debt obligations “as early as June 1, if Congress does not raise or suspend the debt limit before that time.”
Fed Does Not Get Involved in Negotiations
Powell stressed that the Federal Reserve does not get involved in negotiations on this topic. The institution does not give advice to either side and simply points out the importance of resolving the issue by raising or suspending the debt limit.