Powell Is Sounding the Alarm on the Debt Limit—Again

In 2011, in the worst political showdown over the U.S. debt limit to date, a little-known Treasury official helped convince lawmakers that raising the debt ceiling was the only option. He’s back at it now, but from a much higher perch: chair of the Federal Reserve.

Jerome Powell, a financier who was also then serving at a Washington think tank, crisscrossed Capitol Hill in 2011 to shoot down alternatives to boosting the debt limit, at a time when a number of Republicans were shrugging off warnings from President Barack Obama’s Treasury Department.

Then—as now—some lawmakers were starting to question whether a payments default would really be so bad. Powell rattled the cage until a last-minute deal averted a default. While his interventions didn’t forestall a damaging downgrade of the U.S. sovereign credit rating, they did pave Powell’s path to join the Fed board.

Next week, the Fed chair will be heading to Capitol Hill to testify on the economy, as U.S. central bankers fret over another debt-limit showdown. Parallels to 2011 run deep, with Republicans again in charge of the House and again seeking sweeping cuts to spending as a condition for raising the ceiling. Questions swirl about whether their conservative flank agrees with the GOP leadership that a default must be avoided.

No one else has emerged to play Powell’s 2011 role, months before the Treasury risks a payments default. That’s after Wall Street executives with Republican ties last month shared private concerns at the Davos, Switzerland, gathering that Speaker Kevin McCarthy and fellow House Republicans hadn’t grasped the economic and financial impact posed by a default, or their proposed payment-prioritization plan.

Powell himself has started reprising his message from more than a decade ago.

“So, I feel like I have to say this—there’s only one way forward here, and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when due,” he said at a February 1 press conference. “Any deviations from that path would be highly risky.”

He’ll have an opportunity to deliver that message directly to lawmakers next week, when he testifies at the Senate Banking Committee on March 7. He’s also expected before the House Financial Services panel.

Twelve years ago, Powell—who declined further comment for this article through a Fed spokesperson—joined the debt-limit bomb squad almost by chance. He was affiliated at the time with the Bipartisan Policy Center (BPC), and had deep knowledge of the Treasury’s payments system from having served in the department under President George H.W. Bush. Powell was well aware of how lumpy the Treasury’s inflows and payments can be in any given month, and he believed deeply that there was simply no alternative to raising the debt ceiling, people familiar with his briefings recalled.

Prioritizing payments for some federal obligations over others—something GOP lawmakers are again looking at today—simply would not mesh with Treasury’s system, even if theoretically possible, in Powell’s experience.

By 2011, Powell had spent two decades away from government, including years with the famed private-equity firm Carlyle Group. His obscurity showed, as his first sessions on Capitol Hill were with junior staffers, but soon after he began meeting with members of Congress. “He wasn’t a well-known entity among policymakers,” said Shai Akabas, the BPC’s current director of economic policy, who joined Powell for briefings at the time.

Former aides recall that back then there was a lack of neutral, transparent, public information about the debt limit, such as when it might be breached and how the Treasury’s payments system worked. Powell’s briefings touched on the mechanics that make it effectively impossible to cherry-pick which bills to pay.

The BPC started developing an independent estimate for when the U.S. would breach its limit—and Powell and his team coined the term “X-date” to refer to it. It’s become the standard term used both in Washington and on Wall Street. (The current X-date is seen by many observers as coming in the third quarter of 2023.)

“I give a factual briefing about the way the debt ceiling works, which is really to say that if we don’t raise the debt ceiling, certain consequences will happen and they just will happen,” Powell told Bloomberg Television in 2011. “I don’t try to give the caucus tactical or political advice.”

At the time, many Republicans, including the Tea Party group, were pushing for major structural fiscal reforms and saw the debt limit as a bargaining chip. “It was important that congressional Republicans understood there was no alternative,” recalled Jason Furman, who was then an economic adviser in the Obama administration and is now at Harvard University. “And at the time, there were lots of theories.”

Powell’s Credibility

Tim Scott, the South Carolina senator who was then in the House, emerged from one briefing saying the GOP conference was already realizing the stakes—but that Powell had spurred the process along. “We were starting to realize that we can’t play games for so long, anyway, but he did a very good job,” Scott said then.

For Republicans, Powell’s credibility was more based in neutrality than in having a GOP background himself. One official familiar with his briefings said Powell’s talks were just based on the facts—not some sort of appeal as a conservative icon. But the same words from a Clinton-administration veteran would have landed differently, the former official said.

For Democrats, Powell’s briefings came as a welcome intervention, and put him on the radar screen for other things. Later that year, the Obama administration tapped him for the Fed board, paired with a Democratic nominee.

“He was just absolutely critical in being a credible Republican voice,” Furman said. “It was how we got to know him and how he came to our attention.”

One complication for Powell as he heads back to Congress next week is that the public is now aware of detailed discussions that Fed policymakers—including Powell himself—had in 2013 about dealing with a potential debt-limit disaster. In October of that year, Fed officials went through a menu of options to intervene in financial markets should Congress go past the X-date without raising the limit. A transcript was released years after the event, per Fed policy.

At that time, Powell embraced a number of steps to assure financial stability, while expressing deep concern with outright purchases of defaulted Treasuries, or swaps for non-defaulted ones in the Fed’s inventory—terming such steps “loathsome.” “But I don’t want to say today what I would and wouldn’t do, if we have to actually deal with a catastrophe on this,” Powell said.

Fast-forward more than nine years, and Powell in his February 1 press-conference remarks said, “No one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner.”

In the meantime, McCarthy declined comment on whether the Republicans will host any nonpartisan brokers to discuss the debt limit this time.

Jason Smith, the GOP chair of the House Ways and Means Committee, recently told the Washington Post that “Republican members are quite well aware” of the stakes “and we will not default.” A spokesperson for Smith referred to those remarks when asked about any sherpa-type consultations.

Furman, the former Obama official, said fresh rounds of briefings would help for both parties.

Some Republicans are flirting with the notion of prioritizing payments, while some Democrats are interested in other alternatives—like invoking the 14th amendment’s insistence on respecting the federal debt or issuing a platinum coin—he said.

“I think it would help,” Furman said, adding that he believes all such alternatives are non-viable. “They all just have tremendous downside and tremendous risk.”

—With assistance from Craig Torres.

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