Fed Chair Powell says he's powerless to protect the economy if Congress lets the US default on its debt

• Nobody can assume the Fed will save the economy if Congress won't raise the debt limit, Powell said.
• If the ceiling isn't raised, the US may default on its debt and enter a self-inflicted recession.
• A debt-ceiling downturn is "just not something we can or should contemplate," the Fed chair said.

The Federal Reserve won't come to the economy's rescue if the US defaults on its debt, Jerome Powell, the chair of the central bank, said Wednesday.

Congress is, once again, coming dangerously close to a debt-ceiling crisis. Lawmakers have until mid-October to either raise or suspend the borrowing limit, or allow the US to default on its debt. The latter outcome would freeze spending on several critical public programs, spark massive job losses, throw financial markets into chaos, and likely plunge the US into a self-inflicted recession.

In other words, defaulting on government debt is "just not something we can or should contemplate," Powell told reporters at a press conference. Failure to raise the ceiling could spark "severe damage to the economy," and the ball is solely in lawmakers' court, the Fed chair added.

"I think we can agree the United States shouldn't default on any of its obligations and should pay them when due," he said. "No one should assume that the Fed or anyone else can protect the markets or the economy in the event of a failure."

Debt scares aren't anything new on Capitol Hill. The ceiling has already been suspended or lifted 57 times in the past five decades. But the 117th Congress is on track to be the first to break the threshold.

Republicans have been adamant that raising the ceiling is Democrats' responsibility alone. Senate Minority Leader Mitch McConnell reiterated his opposition to the effort on Wednesday, saying Democrats shouldn't "play Russian roulette with our economy."

On the other side of the aisle, Democrats are pinning the blame on Republicans' actions. Lifting the limit allows the government to cover only its past spending. After the GOP and President Donald Trump added about $8 trillion in debt through tax cuts and rescue packages, Republicans "are threatening not to pay the bills," Senate Majority Leader Chuck Schumer tweeted Wednesday.

Schumer and House Speaker Nancy Pelosi shared on Monday a measure that would suspend the limit through December. But fervent GOP opposition, a fragile Democratic majority in the Senate, and a looming deadline stand in the way of its passage.

What's at stake if the US defaults

As lawmakers barrel toward the threshold, experts have painted a dismal picture of what a US default would look like. The White House told state and local governments on Friday that failing to lift the ceiling would swiftly freeze funding for programs including Medicaid, the Children's Health Insurance Program, and Federal Emergency Management Agency. The resulting recession would prompt "economic catastrophe," Treasury Secretary Janet Yellen added Monday.

Outside the White House, assessments have been even bleaker. Failure to lift or suspend the ceiling would power a downturn reminiscent of the 2008 financial crisis, Moody's Analytics economists led by Mark Zandi said Tuesday. The US would shed nearly 6 million jobs, and the unemployment rate would leap to 9% from 5.2%, they said.

The resulting market crash could financially cripple everyday Americans. Stock prices would tumble more than 30% before recovering, the team said. Losses from the sell-off would total $15 trillion in household wealth, Moody's estimated.

Such a slump would also come as the country remains mired in a COVID-19-slammed economy. The Fed held its ultra-accommodative policy intact on Wednesday, leaving key supports in place as 8.4 million Americans remain unemployed. Powell hinted that a pullback could start in November, but even then, it would likely take years for Fed policy to fully return to precrisis norms.