Failure to raise debt ceiling would cause severe market disruptions: Fed
0 Comment(s)
Print
E-mail
Xinhua, July 13, 2011
The U.S. Federal Reserve said on Tuesday that even a short delay in the payment of principal or interest on the Treasury Department's debt obligations would likely cause severe market disruptions.
Such a delay would have lasting effect on U.S. borrowing costs, the central bank noted in minutes released on Tuesday of a Federal Open Market Committee (FOMC) meeting held in June.
The Fed said the participants of the monetary policy meeting were "concerned about the possible effect on financial markets of a failure to raise the statutory federal debt ceiling in a timely manner."
The U.S. federal government's borrowing limit, currently at 14. 29 trillion U.S. dollars, was reached on May 16 this year. The U.S. Treasury Department warned the world's largest economy would default without an agreement to lift the limit by Aug. 2.
Policymakers of the central bank cited the uncertainty from the debate over the statutory debt limit and its potential implications for near-term fiscal policy as one of the biggest downside risks for the U.S. economy.
"Against a backdrop of disappointing economic data, heightened uncertainty about the situation in Europe, and, possibly, concerns about the U.S. federal debt ceiling, market participants reported a general pullback from risk-taking and a decline in liquidity in a range of financial markets," noted the Fed.
The central bank held that the pace of the economic recovery slowed in recent months and that conditions in the labor market had softened.
"Measures of inflation picked up this year, reflecting in part higher prices for some commodities and imported goods. Longer-run inflation expectations, however, remained stable," according to the minutes.
The Fed officials also set possible strategies of gradual exit from its current monetary policy for normalizing its monetary policy stance, saying it would begin raising its target for the federal funds rate when economic conditions warrant, and then sell the Treasury securities it held "over a period of three to five years".
When the U.S. economy stalled last summer, the Fed in November rolled out the second round of quantitative easing (QE) to purchase 600-billion-dollar long-term Treasury securities, dubbed QE2, to keep medium- and long-term interest rates low and facilitate business and household borrowing. The Fed has spent more than 2 trillion dollars to boost the economy since the financial crisis broke out in the fall of 2008.
Go to Forum >>0 Comment(s)