(Bloomberg) -- Federal Reserve Chair Jerome Powell said failure to reach a deal on the US debt limit could have dire consequences for the economy, but that the US central bank would not intervene in the political debate over the issue.
“Congress really needs to raise the debt ceiling — that’s the only way out,” Powell told lawmakers during his semi-annual testimony before the Senate Banking Committee Tuesday. “If we fail to do so, I think that the consequences are hard to estimate, but they could be extraordinarily adverse and could do long-standing harm.”
Powell said the matter is between executive branch and Congress.
“We do no seek to play a role in these policy issues,” he said.
Lawmakers on Capitol Hill remain locked in disagreement over raising the federal government’s statutory debt limit. Some Republicans have insisted that Democrats and the White House agree to future spending cuts before they lift the ceiling. President Joe Biden has refused to negotiate, saying the government must simply honor its existing obligations.
Outstanding US debt hit its legal limit of $31.4 trillion in January. Treasury Secretary Janet Yellen told congressional leaders at the time that her department could continue paying the government’s bills at least through early June by implementing special accounting maneuvers.
The fight over the debt limit also adds a complicating factor to the central bank’s efforts to trim its massive balance sheet, known as quantitative tightening. Constraints imposed on the Treasury Department by the debt limit could end up amplifying some of the impact of QT later this year and could propel it to an early end. Fed officials say they are watching money markets closely and are prepared to adjust their approach if needed.
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