How will the Fed respond if America defaults on its debt?

Federal Reserve Chairman Jerome Powell was asked on Wednesday what the Fed would do if the US defaulted on its debt, and the response by Powell was clear on the matter: “America default is inconceivable and there is very little the Fed can do to prevent the economy.” collapse if the government does not pay for it.

Powell said that it should not be assumed that the reserve can really protect the economy, the financial system and the country’s reputation globally from damage that may be caused if the government defaults on its debt.

Despite these statements, after the failure to rescue the “Silicon Valley” bank on March 10, the Federal Reserve took steps that experts expect may be similar to what it might do in the event of an exacerbation of the US debt crisis, such as agreeing to accept distressed securities at their nominal value, as collateral for loans to banks. Which may give some reassurance to the markets.

monetary easing

Quantitative easing is now an integral part of the Federal Reserve’s playbook, and its $7.8 trillion balance sheet in terms of the Fed’s management of interest rates and monetary policy.

Theoretically, central banks may not like to buy private corporate bonds at low rates but if the alternative is a recession, experts speculate that the Fed may do what it takes to mitigate the crisis.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top