US debt default could cause ‘longstanding harm,’ Fed Chair Jerome Powell says

(WASHINGTON) — Federal Reserve Chair Jerome Powell on Tuesday warned of potentially devastating consequences of a U.S. debt default and called on Congress to raise the debt ceiling.

Speaking to the Senate banking committee, Powell said a potential U.S. debt default could be “extraordinarily adverse and do longstanding harm.”

“At the end of the day, there is only one solution to this problem and that is Congress,” he added. “Congress really needs to raise the debt ceiling. That’s the only way out.”

The U.S. risks defaulting on its debts as early as July unless the borrowing limit is raised, the nonpartisan Congressional Budget Office said in a report last month.

The federal government on Jan. 19 reached its approximately $31.4 trillion debt ceiling — which legally caps how much the U.S. can borrow to pay for what tax and other revenue doesn’t cover — and the Treasury Department has since been using “extraordinary measures” along with its current cash flow to keep the government’s obligations paid.

Failure to raise the debt limit and the ensuing default on U.S. debt — which have never happened before — would all but ensure a U.S. recession that could put millions out of work, economists and budget analysts previously told ABC News.

The remarks from Powell add urgency to an ongoing political dispute in Congress over the debt ceiling.

Some Republicans in the House have resisted an increase of the debt limit unless Democrats agree to spending cuts. The Biden administration, however, has repeatedly said that it will not negotiate over the debt ceiling and that a discussion over spending should occur separately.

When asked whether the current uncertainty about a debt ceiling increase has damaged the economy, Powell said, “In principle, it could.”

“I think markets tend and observers tend to watch this and tend to think that it will work out and it has in the past worked out,” he added. “And it needs to work out this time, too.”

Mark Zandi, chief economist at Moody’s Analytics, was set to testify to a separate Senate committee on Tuesday on the risk posed by a debt default.

“The Treasury debt limit is an immediate threat to any optimism the economy can skirt recession in the coming year and poses a long-term threat to the nation’s finances and economic growth,” Zandi will tell senators, according to his prepared remarks. “Financial markets and the economy would be hit hard.”

In addition to comments about the debt ceiling, Powell spoke at length about inflation, which has fallen significantly from a summer peak but is more than triple the Fed’s target of 2%.

The inflation fight “has a long way to go and is likely to be bumpy,” Powell said.

The Fed last month imposed the latest in an aggressive string of borrowing cost increases as it tries to slash price hikes by slowing the economy and choking off demand. The approach, however, risks tipping the U.S. economy into a recession.

In all, the Federal Reserve has raised interest rates 4.5% over the past year.

Citing elevated inflation and a tight jobs market, Powell said the central bank expects “ongoing increases” to its benchmark interest rate and a sustained period of elevated rates before a change in policy.

Powell has repeatedly said that the Fed will keep its benchmark interest rate elevated until inflation reaches the central bank’s 2% target. That means borrowers face higher costs for everything from car loans to credit card debt to mortgages.

“We will stay the course until the job is done,” Powell said on Tuesday.

Despite heightened borrowing costs, the economy has largely defied an anticipated slowdown.

The economy added a staggering 517,000 jobs in January, well above the breakneck pace of some 400,000 monthly jobs added on average last year, according to government data released last month.

Fresh retail sales data last month blew past economist expectations, suggesting resilient consumer spending, the lifeblood of the U.S. economy.

The combination of easing inflation and sustained economic growth have rasied hope among some of a “soft landing,” in which the Fed slows the economy and brings down inflation while preventing the U.S. from entering a recession.

The hot economy could cause inflation to rise, however, prompting the Fed to raise rates further and risk a deeper and more prolonged economic slowdown.

A survey conducted last month by the National Association for Business Economics found that 58% of economists expect a recession in 2023.

Some Democratic senators have raised fears that continued rate hikes could cause an economic downturn that hurts low- and middle-income Americans.

“Raising interest rates can’t rebuild our supply chains and fix demand imbalances from the pandemic,” said Sen. Sherrod Brown. “Raising interest rates won’t end Russia’s brutal invasion of Ukraine.”

“Not only will higher interest rates not solve it,” the Ohio Democrat added. “If they’re overdone, they’ll make it worse.”

In response, Powell acknowledged the complex reasons for heightened inflation but reaffirmed the role of the Fed in addressing price increases.

“We’re well aware that this particular situation involves a mix of forces, not all of which our tools can affect,” Powell said. “But there is a job here for us to do.”

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