The Fed is ordinarily heavily involved in the government’s day-to-day finances, and has increased its involvement exponentially in the last year. It now holds $1.6 trillion of Treasury securities, most of which it purchased since last fall under a controversial easing program that ended in June. All of those bonds are covered by the current $14.3 trillion debt limit.
Analysts speculate that the Fed could sell some of its bonds to public investors to raise cash, and through various maneuvers, transfer the cash to the Treasury — all without violating the Treasury’s current debt ceiling.
Since the Fed has so many Treasury securities in its portfolio, “this drill could keep the government going and all creditors paid for another 18 months,” said Peter Morici, business professor at the University of Maryland.
“In the end, the Federal Reserve and Treasury have potent options at their disposal to head off an immediate bond rout and keep the government going until Republicans and Democrats agree on a combination of tax and spending reforms to strengthen federal finances,” he said.