Fed mulled supporting key debt market in case of U.S. default

WASHINGTON (Reuters) – The Federal Reserve investigated how it could keep a massive short term lending market from freezing up if America defaulted on its debt, according to a person familiar with planning that was done by the New York Fed.

The person, who asked not to be identified, told Reuters on Tuesday that officials researched whether they could lend support to the triparty repo market, which is one of the pillars of short-term lending on Wall Street.

The comments follow the revelation on Monday that congressional staff had seen documents on the Fed’s planning for how to manage a sovereign debt default.

Those documents included plans for scheduling deferred debt payments as well as Fed lending facilities, and were sparked by America’s brush with disaster in 2011 and 2013 when political fights over the national debt nearly left the federal government unable to pay its bills.

As part of its planning, the Fed looked at what it could do if clearing banks did not take defaulted U.S. debt as collateral in the triparty repo market, the person familiar with Fed planning said.

“They really did not know whether that was going to be possible,” the person said.

The person also said the Fed’s planning included prewritten press releases and other materials aimed at maintaining calm in markets in the case of a default.

“They were much more concerned about how to manage any sort of market fall out,” the person said.

The New York Fed did not immediately respond to a request for comment.

(Reporting by Jason Lange and Sarah N. Lynch)

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