Thursday, July 21, 2011

Federal Reserve prepares for US default

The US Federal Reserve building

Source: Press TV

The US Federal Reserve is preparing for a default as President Barack Obama's talks with top congressional Democrats and Republicans to lift the nation's debt ceiling are deadlocked.

Philadelphia Federal Reserve Bank President Charles Plosser said on Wednesday that the Fed has been working closely with the Treasury for the past few months to come up with a plan should the world's biggest economy run out of cash, Reuters reported.

“We are in contingency planning mode. We are all engaged... It's a very active process,” Plosser said.

He added that his "gut feeling" was that President Obama and Congress will come to an agreement to increase the Treasury's borrowing authority in time to avert a default on government obligations.

Meanwhile, the US president has voiced willingness to accept a short-term increase in the debt ceiling provided that it is tied to agreement by both parties on a comprehensive deficit reduction deal sought by Obama.

This comes as the incumbent US president had previously rejected such a short-term increase in the debt limit - which caps the amount of money the US government can borrow.

So far, the main sticking point in ongoing negotiations on a measure to elevate the US debt ceiling and avoid a government default has been Republicans' refusal to accept increased tax revenue sought by Obama and Democrats.

Obama is pushing for a balanced approach that allegedly enables the Washington government to go ahead with plans drawn for education, infrastructure development and clean energy. Balanced approach includes spending cuts and increased tax revenues.

Last week, Standard & Poor's financial services company and Moody's Investors Service put the US AAA rating on formal credit watch, warning there is a chance of downgrade if talks between the White House and Republicans on raising the debt limit remain stalemated.

Federal Reserve Chairman Ben Bernanke has warned that a global financial crisis could take place if the US debt ceiling is not raised by August 2. The US debt ceiling is currently capped at $14.3 trillion.

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