Tags: Fed | debt | Crisis | default

Fed Officials: Not Much We Can Do About Debt-Limit Crisis

Friday, 29 Jul 2011 03:02 PM

The Federal Reserve has pretty much done all it can for the economy and can do little to steer it from a failure to raise the debt ceiling that could throw the country into default, say two Federal Reserve governors.

"We can't do anything directly to fix this," James B. Bullard, president of the Federal Reserve Bank of St. Louis, told CNBC. "If the Treasury can't issue more debt, they can't issue more debt. We cannot buy debt directly from the Treasury. We can only buy debt in the open market," he said.

"If it led to a generalized crisis, we can come in and provide liquidity to markets as we did in 2008 and in 2009 but the Fed doesn't have any ability to fix this situation. It's up to the Congress and the president," he said,

Bullard, however, says he predicts Congress and the Obama administration will resolve the impasse and lift the country's $14.3 trillion debt ceiling.

The deadline for Congress to act is Aug. 2, or the government could default on its obligations.

Dennis P. Lockhart, president of the Federal Reserve bank of Atlanta, agrees that Congress and the White House must steer the country away from default — and a possible ratings downgrade after a default.

"Don't look to the Fed to offset the damage that could be incurred here," he told CNBC.

Both Bullard and Lockhart say monetary policy authorities can "never say never" when comes to rolling out fresh measures to stimulate the economy in general, but that won't likely be necessary.

"I think the key point is our expectation is this is going to get done," Lockhart says.

The Federal Reserve wrapped up a second round of quantitative easing — where the Fed buys assets from the private sector and pumps money into the economy in the process — although conditions don't warrant a return to such policies at the present, Bullard and Lockhart say.

The bar is high for fresh easing.

"It's a very high bar. I don't completely rule it out but it's a high bar. We have a very high accommodative policy today. We're holding the balance sheet essentially even and we have the overnight interest rate as low as it can go," Lockhart says.

While monetary policy remains expansive, the language the Fed uses as a weather vane for future policy actions also suggests low interest rates and hefty money supply will continue.

GDP Picking up?

The U.S. economy grew less than forecast in the second quarter.

Gross domestic product rose at a 1.3 percent annual rate following a 0.4 percent gain in the prior quarter, both disappointing figures, according to the Commerce Department.

"This is all confirming what we already knew, which is that the first half has not been as strong as we like," Bullard says.

High oil prices, the Japanese earthquake and other factors slowed growth, including European and U.S. debt concerns, which should lag less on the economy.

"I think we are in better shape for better growth during the second half of the year," Bullard says.

Still, private economists says they are concerned with the pace of recovery.

"The transition into the second half is on rocky footing," according to Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia, Bloomberg reports.

"Consumers are just refusing to increase their spending, which sets the stage for a stagnant economy. We’re in economic doldrums right now."

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The Federal Reserve has pretty much done all it can for the economy and can do little to steer it from a failure to raise the debt ceiling that could throw the country into default, say two Federal Reserve governors. We can't do anything directly to fix this, James B....
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2011-02-29
Friday, 29 Jul 2011 03:02 PM
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