FirstFT: Fed officials warns of ‘extreme’ market reaction unless debt

Two top Federal Reserve officials warned yesterday that failing to raise the US debt ceiling would have catastrophic consequences as Republicans in the Senate blocked a bill to increase the borrowing limit and stave off a government shutdown.

John Williams, president of the Federal Reserve Bank of New York, said the US central bank would be unable to mitigate the impact of a potential default on the government’s debt.

Williams warned of the risk that investors could become “extremely nervous” and think “I’ve got to get out of things”, which he said could lead to an “extreme kind of reaction in markets”.

He said prices for US Treasuries reflected a belief among investors that “cooler heads” would prevail in Congress and were therefore not necessarily an “indicator of how big the risks are”.

“If you actually crossed that line and got to a place where the government wasn’t paying off its obligations, I think it would create a very negative dynamic not only in the US but around the world,” Williams said, invoking the meltdown in the market for US Treasuries last year.

Federal Reserve governor Lael Brainard also urged lawmakers to act. “Congress knows what it needs to do . . . It needs to step up; it has responsibilities,” she said yesterday.

The comments from Williams were echoed by Treasury secretary Janet Yellen. In testimony due to be delivered to the Senate banking committee later today, she implored lawmakers to raise the debt limit in order to avert what she said would be a “catastrophic event for [the] economy”.

• In other Fed news: Two senior officials, whose trading activity prompted the US central bank to launch an ethics review, said yesterday they were resigning.

Do you think the debt ceiling will be breached? Let me know be emailing gordon.smith@ft.com. Here’s the rest of the day’s news — Gordon 

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