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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?

  • I smell QE4 coming :) – user4012 Oct 7 '13 at 21:05
  • Yes they do have that authority. ...? – Mr. A Oct 7 '13 at 22:08
  • I'm not sure I understand exactly what you mean by claiming securities. If you need more info, feel free to leave a comment next to my answer. – dcaswell Oct 9 '13 at 1:39
  • One idea libertarians have is to cancel all debt held by the federal reserve, as a way of taking a big step forward toward resolving the imbalances faced today. So I am not always sure what the word "default" really means to people, but if I had a lot of treasuries stocked up, I wouldn't mind too much if the USA only did not pay the Federal Reserve. – Mr. A Oct 9 '13 at 3:36
  • @MR.A - that brings up an interesting legal question I posted here: Partial debt payment – jsb1109 Oct 9 '13 at 16:18
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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).

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  • I accepted this answer because of the link to 'Commercial Book-Entry Systems' - this pretty much answers my question and clears up the subsequent confusion. – jsb1109 Oct 9 '13 at 15:50
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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

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    In 1979, a glitch resulted in the government failing to pay the amounts until a few hours after they were due, and I don't think it caused substantial damage. – Avi Oct 8 '13 at 8:31
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    @CHAD - The Treasury is bound to pay on demand at a certain date, but what if its not demanded? The debt instrument would still be considered an asset even if it wasn't claimed, I dont see how they need to claim it to account for it. If the Fed is not demanding payment from the Treasury, how can the payment be late? No one is asking for it... – jsb1109 Oct 8 '13 at 13:09
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    @jsv1109 - The bonds that the fed buys are different than savings bonds that you or I could buy. They are the government equivalent of corporate paper. They are due in full at maturation. There is no certificate to send in the Treasury is just bound to pay the holder X amount on Y Date. – SoylentGray Oct 8 '13 at 13:55
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    @Chad - Are you saying that the holder of government debt simply receives the payment (in their Federal Reserve account?) on that date with no discernible action on the part of the holder? That would make sense to me, but then can you confirm that all holders of debt are required to have an account? If you can provide a reference for how the debt is paid, I'd be happy to mark you answer as accepted. – jsb1109 Oct 8 '13 at 14:19
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    "and the officers of the bank could be held criminally responsible" = but that contradicts the statement that they are "bound by all of the accounting laws that other banking institutions are" :) – user1530 Oct 9 '13 at 4:29

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