Federal Reserve Chairman Jerome Powell’s warning about an “unsustainable” national debt has raised questions about the severity of the nation’s fiscal crisis among some economists who believe the Fed is part of the problem. There is.
Powell warned in an interview published Sunday that the United States is on a dangerous path, piling up a $34 trillion national debt that has reached new heights from pandemic-era spending.
“Over the long term, the United States is on an unsustainable fiscal path. The U.S. federal government is on a fiscally unsustainable path. It means that,” Powell said in an interview on “60 Minutes.”
Powell’s comments came after a year of budget standoffs and near-default that ended with a credit rating downgrade by rating agency Fitch, but without any notable moves to reduce the budget deficit.
According to the Congressional Budget Office (CBO), federal spending is expected to increase from 24% of GDP in 2023 to 29% in 2053, while revenue is expected to increase less over that period, remaining at 18% to 19% of GDP. ing.
“Expenditures are increasing faster than revenues, primarily due to higher interest costs and increased spending on major health programs and social security. This will result in a further widening of the budget deficit in the long run. ” the CBO said in its latest statement. long-term budget outlook Say.
The highly polarized political environment has raised questions about the country’s fiscal health and raised questions about the United States’ ability to service its debt. Fitch Ratings downgraded the U.S. credit rating from “AAA” to “AA+” in August after President Biden and House Republicans agreed to raise the debt ceiling days before default last spring.
“Part of the problem was the governance and political aspects, like an inability to compromise and really address the underlying fiscal situation. And certainly the fiscal situation is getting worse. It continues to get worse,” Richard Francis, co-head of Americas Sovereign Ratings, told The Hill.
Lawmakers on both sides of the aisle have expressed concerns about the sustainability of the national debt, but remain divided over how to address it and the urgency of the issue.
“We are approaching a tipping point where this country cannot maintain its current fiscal levels, continue to service its debt and honor its obligations to the American people,” said Rep. John Rhodes (R-Tenn.). Ta. Tuesday during a hearing with Treasury Secretary Janet Yellen in the House Financial Services Committee.
Sen. John Fetterman (D-Pennsylvania) told The Hill he is “certainly looking at it” but also mentioned other pressing issues regarding the Capitol.
“Obviously, we want to keep the amount of debt to a minimum,” Fetterman said Tuesday. “But now we have more of a focus here. It’s border security for Ukraine, Taiwan, Israel, all of those things and everything else.””
Since the Fitch downgrade, Congress has passed three short-term spending bills, with the next deadlines approaching on March 1 and March 8, a move that Prime Minister Francis said highlights a “deterioration in governance.” He said there was.
“The fact that we can’t even introduce a spending bill and have to rely on this continuing resolution speaks volumes,” he added. However, when asked if Fitch would consider further downgrades in the future, he said, “Now that we have downgraded them, we might be able to tolerate it a little more.”
Throughout his tenure as Fed chief, Powell has urged Congress to address the debt problem.
Powell urged lawmakers in February 2020 to rein in spending while the economy is strong and give the government fiscal space to respond to the crisis. A month later, Congress passed the first trillions of dollars in aid to fight the coronavirus and provide economic relief.
Few economists question the wisdom of responding to a pandemic recession with aggressive stimulus. But Mr. Powell and the Fed have exacerbated that burden with repeated aggressive interest rate hikes, making debt payments more expensive.
“According to the latest projections from the Congressional Budget Office, they have revised upward their projections for budget deficits and debt-to-GDP ratios over the next 10 years. They have made it very clear that the biggest driver of this increase is interest rate hikes. “That’s interest spending. Who’s responsible for that? Who’s doing that? That’s the Fed,” said Stephanie, an economist at Stony Brook University who is a debt skeptic and proponent of Modern Monetary Theory. Kelton told The Hill.
total us bond inventory is $34 trillion, but debt to GDP ratio is about 120 percent, up about 20 percentage points from its previous level of about 100 percent due to the pandemic.
“The breaking point is [if] not enough people want to lend money to the U.S. government, or [if] Jonathan Earnest, an assistant professor of economics at Case Western Reserve University, said, “The risk of borrowing has become so high that the United States has to pay a higher premium for the money it borrows, a real risk premium.” ” he said.
“We don’t seem to be anywhere close to that yet. As this debt continues to grow, we are groping our way into new territory,” he added.
Other economists see more uncertainty about when budget deficits will fall into real problem territory.
“Under current policy, the United States has about 20 years of corrective action, after which it remains to be seen how many future tax increases and spending cuts will be required,” Kent Smetters, an economist at the University of Pennsylvania, wrote in an analysis last fall. Even if we do so, the government will inevitably default on its debts.”
The Fed has been raising interest rates in response to inflation, but it’s unclear whether that has worked as intended. However, some experts consider interest rate hikes to be too blunt a policy measure for modern economies, due to the fact that they would significantly increase the budget deficit.
“Strengthening financial regulation is an alternative to non-interest rate monetary policy,” economics author and researcher Nathan Tankus told The Hill. “If we are worried about fiscal unsustainability, that means more directly that the Fed should use tougher financial regulations to tighten financial conditions. “I’m there” [more than makings suggestions] On what Congress should do regarding spending. ”
Tankas said if interest rates were set so that interest payments never grew faster than economic growth, the problem of unsustainability would disappear and other ways to manage inflation would become more necessary. .
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