What a Fed response to a US debt default could look like

Traders react as Federal Reserve Chair Jerome Powell is seen delivering remarks on a screen, on the floor of the New York Stock Exchange in New York City, U.S., May 3, 2023. REUTERS/Brendan McDermid/File Photo

Unsaid, however, is that just over seven weeks ago Powell showed - again - how willing he is to race beyond the red flags of central banking if the moment calls for it.possible debt default responses Accepting defaulted securities as collateral for Fed loans, or swapping "good" federal debt already held by the Fed for impaired debt held by private investors, would be an extreme variation on the theme - yet one that may prove less "loathsome" than the alternative economic collapse some predict would follow a default.

"They are just not going to be specific about what they will do because it validates a hypothetical they don't want to consider," he said.Powell joined the Fed in 2012 from a think tank where he focused on debt and deficit issues.

QE is now integral to the Fed's playbook, and its $7.8 trillion balance sheet central to how the Fed manages interest rates and monetary policy. On the eve of what would prove a disruptive outbreak of inflation, Powell in the summer of 2020 adopted a years-in-the making effort to shift the Fed's policy focus to put less weight on its price mandate and more on its goal of full employment, correcting what he had come to believe was a policy bias that kept more people out of work than was needed to keep inflation stable.

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