Debt-limit standoff could force Fed to revisit emergency playbook

A crisis-management playbook Federal Reserve officials created years ago could guide their response this fall if the federal government can’t pay all its bills because of a political standoff over raising the federal debt limit.

The options include the Fed buying Treasury securities in default on the open market and selling Treasurys owned by the Fed to counteract potentially severe strains in financial markets, according to the transcript of an October 2013 conference call.

Among the officials who said those steps shouldn’t be ruled out were Jerome Powell —the central bank’s current chairman who was then a Fed governor—and Janet Yellen —the current Treasury secretary who was then Fed vice chairwoman.

Mr. Powell called some measures “loathsome” and others called them “repugnant” or “beyond the pale” for two main reasons. First, they would pierce the Fed’s institutional preference to avoid directly financing the government, often referred to as its independence from fiscal policy. Second, Fed officials worried if such contingency planning became public, elected officials might feel less urgency to raise the debt limit.