Photograph by Joe Raedle–Getty Images
By Stephen Gandel
June 21, 2016

On Tuesday, Janet Yellen, who heads the Federal Reserve, told a Senate panel that the U.S. central bank would not rescue Puerto Rico if the territory is unable to pay its bills. She said it was unlikely for the Fed to lend money to the Puerto Rican government, or to give money to banks there if they run into trouble.

“[A bailout of Puerto Rico] is inherently a matter for Congress, and not a matter for the Fed,” said Yellen. “It is not something that’s appropriate for the Federal Reserve.”

The government of Puerto Rico is more than $70 billion in debt, and has said it is unlikely to be able to pay back creditors in full.

Even if the Fed didn’t want to lend money to Puerto Rico, some have suggested that the Fed could buy up Puerto Rican debt in order to drive down interest rates there and potentially allow the territory to borrow more money. Yellen on Tuesday told the Senate that she thought the Fed’s ability to buy municipal debt was very limited. The Fed has bought up trillions of dollars in mortgage and Treasury debt since the financial crisis and the Great Recession. So in theory it seems like it would be possible for the Fed to buy up municipal bonds in the same way.

But to do so the Fed would have to make the case that buying up Puerto Rican debt would somehow boost the U.S. economy in general. Yellen didn’t seem to think so. She also didn’t seem to think that a Puerto Rican default would have much impact on the U.S. economy in general.

“It’s not a matter for the Fed,” Yellen said.

 

 

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