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Fed Chief Says U.S. on Unsustainable Fiscal Path

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Do the U.S. national debt and the government’s budget deficits matter?

If you listen to the economists shaping the Biden administration’s policy agenda, they say they do not. Their basic argument is that with interest rates so low, the government can borrow as much as politicians want to spend. They think they never have to worry about paying the debt.

On April 14, 2021, Federal Reserve Chair Jerome Powell spoke with David Rubenstein of the Economic Club of Washington, DC. A transcript of their whole discussion is available on C-SPAN. Here’s the money quote about whether the Fed Chief thinks the new spending proposed by the Biden administration is sustainable:

Rubenstein: Are you worried about deficits? The debt is pretty high, $27 trillion or so, the deficit is $3 trillion or so. Is that a concern to the Fed in terms of impacting inflation?

Powell: Yes. Over time and in the longer run, the U.S. federal budget is on an unsustainable path, meaning that the debt is growing meaningfully faster than the economy and that’s unsustainable over time by definition.

But then Powell said something surprising with respect to the government’s current debt level:

Powell: It’s a different thing to say that the current level is unsustainable. It’s not. The current level is very sustainable and there is no question of our ability to service and issue the debt for the foreseeable future. I would also say that as a nation, we will have to eventually get back to a sustainable path. That’s best done in good times, when the economy is at full employment and when taxes are rolling in. This is not the time to prioritize the concern, but it’s nonetheless an important concern that we will ultimately have to return to when the economy is strong.

With the lifting of repressive state and local government lockdowns, the U.S. economy will grow rapidly this year. Worse, because the U.S. government has spent so much giving out stimulus checks, inflation has been unleashed. A trip to any grocery store, gas station, car lot, or real estate office can confirm that truth.

That is to say the time for the Fed to be concerned is now. The need for action to put the U.S. government onto a sustainable fiscal path will come much sooner than many expect.

But the leadership for that action will not come from the White House. Powell seems to understand the action will be needed and will require the Fed to hike interest rates. The question is when will he and the Fed take steps to rein in President Biden’s unsustainable spending spree by making the debt to fund it too costly to consider?

The post Fed Chief Says U.S. on Unsustainable Fiscal Path appeared first on The Beacon.


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