Federal Reserve Plans to Deal With U.S. Default

The Federal Reserve is readying itself for the possibility of a United States default as the deadline for raising the government’s $14.3 trillion debt ceiling draws ever-closer.

The Fed has been working closely with the Treasury to make preparations in case the world’s biggest economy runs out of dollars on the August 2 deadline, according to Philadelphia Reserve Bank President Charles Plosser.

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

According to Plosser one of the Feds contingency plans, which is purely operational is to develop procedures on how the Treasury will inform them on which checks get cashed and which don’t. This is a vital detail as the Fed acts as the Treasury’s bank; clearing the Government’s checks including social security and federal workers’ checks.

“We are developing processes and procedures by which the Treasury communicates to us what we are going to do,” Plosser said. “How the fed is going to go about clearing government checks. Which ones are going to be good? Which ones are not going to be good?”

Plosser also addressed a difficult question the Fed has to deal with; based on good collateral, the Fed lends to banks at the discount window, but what happens if the U.S.’s Treasuries lose that kind of reputation?

“Do we treat them as if they didn’t default, in which case we would be saying we pretended it never happened? Or do we treat them as if they defaulted and don’t lend against them?” Said Plosser.

Plosser feels President Obama and Congress will come to an agreement to increase the Treasury’s borrowing authority in time to avoid a default on government obligations.

Obama was scheduled to meet with the top Republicans in Congress on Wednesday to find a solution to the dispute on the nation’s debt ceiling crisis.