The Debt Limit Standoff is a New Economic Headwind for the Fed

The Federal Reserve’s decision about whether to continue raising interest rates comes at a fraught economic moment for the United States, with President Biden and Republicans in Congress locked in a standoff over how to raise the nation’s debt limit.

High inflation and instability in the banking system continue to weigh on the United States economy, but a more pressing concern is the prospect of a default. The federal government could be unable to pay all of its bills on time as soon as June 1, Treasury Secretary Janet L. Yellen warned this week, setting the stage for a self-inflicted economic calamity.

Analysts and economists have increasingly warned that a default could send financial markets plunging and tip the United States, and perhaps the global economy, into a recession.

A Treasury official pointed to the debt limit as a top risk facing the economy, saying that failure to raise the borrowing cap would cause a financial crisis of “historic proportion” and a sharp economic contraction that would leave millions of Americans facing unemployment. It would also probably trigger a spike in borrowing costs and prevent Social Security and Medicare beneficiaries from receiving their benefits.

The Fed has insisted that it is up to Congress to act to raise the $31.4 trillion debt limit, and Jerome H. Powell, the Fed chair, warned earlier this year that failing to do so would inflict long-term damage to the U.S. economy.

“Congress really needs to raise the debt ceiling,” Mr. Powell told the Senate Banking Committee in March. “If we fail to do so, I think that the consequences are hard to estimate, but they could be extraordinarily adverse and could do longstanding harm.”