The Fed and Treasury have seen enough debt ceilings to develop a playbook that can be pieced together from past FOMC transcripts and Congressional subpoenas. The Fed does not want to interfere in debt ceiling negotiations, which are part of the political process. But a default by Treasury may trigger enough market turmoil to affect financial stability and ultimately prompt Fed action. At the moment, Treasury debt maturing around late October is already exhibiting some signs of distortion. Treasury will make noises to scare Congress into action, but it understands the importance of avoiding default and will prioritize debt payments once it runs out of headroom. Prioritization can support the Treasury market indefinitely, and even if that support is withdrawn the Fed stands ready to act as dealer of last resort. In this post we detail the debt ceiling playbook as the ceiling moves from not binding to binding, and review the nuclear option in case things still don’t work out.

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