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Fed's Lacker: Congress playing with fire on debt limit

By Rachelle Younglai

WASHINGTON (Reuters) - A top Federal Reserve official on Monday warned that Congress was playing with fire by not raising the country's legal borrowing limit in a timely fashion.

Richmond Fed President Jeffrey Lacker echoed Fed Chairman Ben Bernanke's worries that a failure to do so before the last possible date of August 2 could have catastrophic consequences.

"I do share the chairman's concern that going up to the edge and playing chicken on the debt ceiling is not a wise strategy," Lacker told Reuters in an interview.

In a week, the United States is due to hit the $14.294 trillion debt limit that caps the amount the country is legally allowed to borrow.

A delay in raising the debt ceiling could cause widespread damage across markets and hurt U.S. growth if it led to a technical default, but this situation is unlikely, according to a JPMorgan report last month.

Congress is nowhere close to brokering a deal to raise the ceiling, forcing the U.S. Treasury to start moving funds around to meet government obligations.

Lacker said those measures have already had a "somewhat disruptive effect" on the short term financing markets. "The lack of supply of short-term Treasury bills has disrupted the (repo) market to some extent," he said.

Treasury has a number of tools it can use to give the government room to meet its obligations, including paying interest on U.S. debt. But those measures will only allow the government to borrow until August 2.

Republican and some Democratic lawmakers are unwilling to authorize more borrowing unless it is accompanied by strict reforms to government spending and plans to slash the $1.4 trillion deficit.

The roughly three-month window will give the Obama administration and Congress some time to negotiate a deal, but Lacker, Bernanke and Treasury Secretary Timothy Geithner have told Congress not to take it too close to the edge.

"I don't think it's a situation where everything is fine until some day. Things are being disrupted already because of the lack of action on the debt ceiling," Lacker said.

"The legislators I know in my district are pretty smart people. I trust it's fairly obvious to them, that the longer you go, the more you're really kind of playing with fire here, because of the potential for adverse financial market reactions to brinkmanship," he said.

Lacker said he is not lobbying Congress on the debt ceiling, unlike the business community and Wall Street.

(Reporting by Rachelle Younglai; Editing by Andrew Hay)