Could the Fed Rescue US From the Debt Ceiling?

Federal Reserve
Federal Reserve

The Federal Reserve maybe able to fund the U.S. government if no deal to raise the debt ceiling is reached.

The Fed currently owns about $1.63 trillion of Treasurys. It can sell these through its open market operations. All Fed income that exceeds the Fed’s costs are remitted to the U.S. Treasury Department. Which means that the revenues from selling Treasurys could be used to fund government operations instead of borrowing.

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.


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