Federal Reserve authority to buy government debt

Question

Does the Federal Reserve have the ability or authority to offer to buy (at a premium?) any government debts coming due and simply choose not to claim them from the Treasury?

In context of the current debt limit debate, I am wondering if the Fed can step in and buy up the debt that is coming due and just choose not to claim it. I know at times they roll over debt, and receive new securities for those that are due. However under this scenario, new debt is being issued by the Treasury.

To be specific, I think my question is two fold:

1. Can the Fed choose not to claim securities that they are holding, that are due? / Is this allowed by their accounting or charter?

2. If the Fed was holding all the debt that came due when the government runs out of money, and they choose not to claim it, would the government be in default or not?

Answer 1

The Federal Reserve has been conducting Open Market Operations for many decades; the law was passed in 1913.

Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve in the implementation of monetary policy. Historically, the Federal Reserve has used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate around the target federal funds rate established by the Federal Open Market Committee (FOMC). OMOs are conducted by the Trading Desk at the Federal Reserve Bank of New York. The range of securities that the Federal Reserve is authorized to purchase and sell is relatively limited. The authority to conduct OMOs is found in section 14 of the Federal Reserve Act.

The law is defined here.

According to this article Open Market Operations were common in the 1920s. It's always been the Federal Reserve's preferred way of injecting liquidity into the bond market.

By the mid-1920s, the System became more active. Under the leadership of Benjamin Strong, it initiated action to induce banks to borrow or repay lending. From this modest start, open market operations became the Federal Reserve’s principal and usually only means of changing interest rates and bank reserves.

What's unique about the Federal Reserve's recent Quantitative Easing is the size of the interventions.

If the Treasury isn't able to make coupon payments, or pay for maturing bond/notes/bills they are in default. You don't have to ask for payments. Virtually all U.S.-based securities bonds/stocks/etc. exist as book-keeping entries in the Federal Reserve System.

For Treasuries there are various levels of Commercial Book-Entry Systems

At the top tier of CBES is the National Book-Entry System (NBES), which is operated by the Federal Reserve Banks. For Treasury securities, the Federal Reserve operates NBES in their capacity as the fiscal agent of the U.S. Treasury. The Federal Reserve Banks maintain book-entry accounts for depository institutions, the U.S. Treasury, foreign central banks, and most government sponsored enterprises (GSEs).

Answer 2

Can the Fed choose not to claim securities that they are holding, that are due?

No. The US Treasury is bound to pay the interest due on the notes on a specific date. If the Treasury fails to do so then it is in default. The interest paid is an asset of the Federal Reserve bank and must be accounted for as such

Is this allowed by their accounting or charter?

No the Fed is bound by all of the accounting laws that other banking institutions are. They are required to list all of their assets and liabilities. Failure to account for them could result in their being shut down (at least theoretically) and the officers of the bank could be held criminally responsible for it under reforms passed in the Sarbanes Oxley act.

If the Fed was holding all the debt that came due when the government runs out of money, and they choose not to claim it, would the government be in default or not?

Yes. If the government pays the amount due a day after it was supposed to pay it then the government defaulted on its debt. What would the impact be? Lets hope we do not find out. I suspect that the US Dollars status as the reserve currency of choice right now would mitigate the damage in the short term. And should we quickly right the ship then the damage would be temporary. If not then as Bob Dylan sang The times they are a changing