Wednesday, July 20, 2011

Federal Reserve is Preparing for US Default

Perhaps the reason for the late afternoon vault in gold and silver back above $1600 and $40 respectively is this doozy from Philadelphia Federal Reserve President Charles Plosser, who stated that "the Fed is actively preparing for the possibility that US could default."
While we continue to believe there will be a last second agreement to extend the status-quo, Plosser's statement is likely to jolt the bond market out of bed.
From Reuters:

The Federal Reserve is actively preparing for the possibility that the United States could default as a deadline for raising the government's $14.3 trillion borrowing limit looms, a top Fed policymaker said on Wednesday.

Philadelphia Federal Reserve Bank President Charles Plosser said the Fed has for the past few months been working closely with Treasury, ironing out what to do if the world's biggest economy runs out of cash on August 2.

"We are in contingency planning mode," Plosser told Reuters in an interview at the regional central bank's headquarters in Philadelphia. "We are all engaged ... It's a very active process."

Plosser said his "gut feeling" was that President Barack Obama and Congress will come to an agreement to increase the Treasury's borrowing authority in time to avert a default on government obligations.
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