Sales of Treasurys by the Fed would not violate the debt ceiling laws, because the debt has already been issued. It is already counted against the debt ceiling.
The U.S. government borrows around $125 billion each month. This means that, at least in theory, it is possible for the Fed to fully fund the borrowing needs of the U.S. government for nearly a year.
The Fed typically sells U.S. government debt when it wants to take money out of the system in order to reduce inflationary pressures. In ordinary times, such sales raise interest rates, because the market is oversupplied with U.S. government debt.
But rates wouldn’t necessarily rise if the Fed was selling at a time when the U.S. Treasury is not. In fact, they might fall because the unwillingness of the U.S. government to issue more debt would potentially create a supply shortage.
One concern might be that having the Fed exchange Treasurys for dollars could be deflationary. But, again, this might not be the case at a time when the Treasury isn’t issuing debt of its own. The dollars taken in from the Treasury sales wouldn’t be taken out of the economy—they would be poured back into it through government spending.
This might be an unlikely move for the Fed. The Fed has never undertaken anything like this operation. But over the past few years, we’ve seen the Fed do many things it has never done before.
Questions? Comments? Email us atNetNet@cnbc.com
Follow John on Twitter @ twitter.com/Carney
Follow NetNet on Twitter @ twitter.com/CNBCnetnet
Facebook us @ www.facebook.com/NetNetCNBC