NEW YORK, Sept 27 (Reuters) – New York Federal Reserve Bank President John Williams on Monday warned of the potential negative market reaction if the United States failed to solve its debt-ceiling issue here, but said market participants right now seemed to think the problem would be resolved.<\/p>\n
The U.S. Congress faces a pair of approaching deadlines to fund the government and address the nation\u2019s $28.4 trillion debt ceiling. It has a Sept. 30 deadline to avert the start of a shutdown of government services.<\/p>\n
Meanwhile, independent analysts warn that the U.S. Treasury Department is likely to exhaust its borrowing authority between Oct. 15 and Nov. 4, meaning the government faces the risk of a default if Congress does not act.<\/p>\n
Asked about the scale of possible market disruption in a scenario where the debt ceiling goes unresolved and there is a default, Williams said that situation could cause investors to \u201cget out of things and that\u2019s when you see that kind of extreme kind of reactions in markets.\u201d<\/p>\n
\u201cWe\u2019re not seeing that, I\u2019m not predicting that,\u201d Williams said during a video call with reporters on Monday afternoon. \u201cI\u2019m just saying that, you know, if you actually crossed that line and got into a place where the government wasn\u2019t paying off its obligations, I think it would create a very negative dynamic not only in the U.S. but around the world.\u201d<\/p>\n
Williams said there was some \u201cmarket pricing\u201d around U.S. Treasury bills that mature, \u201caround the time that people expect\u201d the true debt limit is hit.<\/p>\n
Still, he said that from everything he has heard, market participants expect \u201cthat this will be resolved.\u201d He added, however, that he does not think \u201cyou can look at market pricing really as an indicator of how big the risks are.\u201d<\/p>\n
In a research note published on Monday, Michael Purves, CEO at Tallbacken Capital Advisors in New York, wrote that there was some debt ceiling-related tension reflected in the Treasury bills market, shown in pricing of three-month bills which \u201cpresumably won\u2019t be burdened by default risk\u201d compared with one-month bills, but that it has yet to reflect the more dramatic spikes in 2011, 2013 and 2015.<\/p>\n