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Federal Reserve policymakers at their most recent gathering discussed concerns about the potential for prolonged partisan wrangling over raising the federal debt limit to disrupt the economy and financial markets.
“A number of participants stressed that a drawn-out period of negotiations to raise the federal debt limit could pose significant risks to the financial system and the broader economy,” minutes of the January 31-February 1 Federal Open Market Committee meeting showed on Wednesday.
Republicans and Democrats have staked out opposing positions on lifting the US$31,4 trillion statutory debt ceiling, which was reached last month.
The Treasury Department is currently applying special accounting measures to keep making payments on federal obligations, but that scope is expected to be exhausted within months.
Fed officials said that one of the downside risks to the economy was “disruptions in the financial system and broader economy associated with concerns that the statutory debt limit might not be raised in a timely manner,” the minutes showed.
Republicans, who have a narrow majority in the House, are demanding steep spending cuts in return for raising the debt limit.
But President Joe Biden has called for a “clean” increase or suspension of the ceiling, as was done repeatedly in past years including multiple times for former GOP President Donald Trump.
Any steep spending cuts would also be unlikely to pass in the Senate, where Democrats have a majority.
Negotiations haven’t yet been scheduled to craft some sort of compromise.
A similar partisan showdown in 2011 saw financial markets roiled, with equities sliding after S&P Global Ratings lowered the sovereign US credit rating from AAA for the first time. –Bloomberg
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