The WSJs Timiraos, in an article outlines the "loathsome" playbook in the event of a Debt-ceiling standoff. The expectations are that we don't get to that point but you never know.
Potential actions from the Fed include
- Buying Treasurys shunned by investors due to delayed payment risk or allowing banks to pledge defaulted securities as collateral for loans from the central bank .
- In 2011 the Fed plan involved managing government payments to prioritize principal and interest on government debt, allowing banks to count defaulted Treasurys toward their required capital buffers, and not penalizing banks facing a drop in capital ratios due to unusual cash demands.
Although some contingency strategies exist, the Fed's ability to remove defaulted securities from the market is limited given the size of the Treasury market.
Once again, it is probably not the odds on favorite for a debt ceiling plan not passing, but, if an agreement is delayed and it forces a shutdown (it is likely to be temporary), it is best to know what can be done. Regardless, however, the rating agencies would likely downgrade US debt, that could force rates higher (at least in the short term) and likely lead to increased risk in other markets including stocks.