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The head of the Federal Reserve warned that the US economy is too strong to justify running such high deficits and urged Washington to address its fiscal imbalance “sooner rather than later”, in a sign of growing concern among monetary policymakers about rampant government spending .
Jay Powell warned that the Biden administration was taking excessive risks by running a very large deficit “when we’re at full employment,” saying, “you can’t run these levels for too long in good economic times.”
The unemployment rate in the world’s largest economy has not exceeded its current level of 4 percent in more than two years, longer than at any time since Powell was a “teenager,” the Fed chairman said on Tuesday.
Speaking at the European Central Bank conference in Sintra, Portugal, Powell said “the level of debt we have is completely sustainable, but the path we’re on is unsustainable”.
His comments came amid growing concerns about debt levels as both President Joe Biden and Donald Trump make good on campaign promises that appear unlikely to reduce the deficit regardless of who wins the November election.
US output has grown at a faster pace than other major advanced economies since the Covid-19 pandemic, but its fiscal deficit has remained larger than its G7 counterparts, even as unemployment hovers near record lows.
The Congressional Budget Office now expects the U.S. fiscal deficit this year to reach $1.9 trillion, or 7 percent of GDP, up from a February forecast of $1.5 trillion. The debt-to-GDP ratio is projected to reach 122 percent by 2034, easily surpassing the post-World War II record high of 106 percent.
Concerns are growing about the rising U.S. national debt, which is expected to reach 99 percent of GDP this year.
Trump’s plans for permanent tax cuts in 2017 would increase deficits by less than $5 billion over the next 10 years.
People in Trump’s camp have threatened to replace Powell as Fed chairman if he returns to the White House. But Powell said, “There is very broad support for an independent Fed in both parties on both sides of Capitol Hill. . . where it really matters.”
The Fed chairman welcomed the recent drop in the preferred US inflation rate to 2.6 percent in May as “really good progress” but said he still wanted to see more evidence that price pressures and the labor market were cooling before he began to reduce interest. rates. U.S. borrowing costs fell slightly in response, with the 10-year Treasury yield down 3 basis points to 4.44 percent.
Governments have increased their debt issuance in recent years as they spent huge sums to support households and businesses in response to the pandemic and the energy crisis following Russia’s large-scale invasion of Ukraine.
But now central bankers worry that politicians are too slow to cut spending, which could threaten financial stability and keep inflation high.
ECB President Christine Lagarde only partially echoed Powell’s comments, stressing the need for EU governments to comply with the bloc’s reintroduced debt rules by curbing their deficits, while urging them to boost growth and productivity through targeted investment and structural reforms .
Financial markets were spooked by the risk that France’s snap parliamentary election could produce a far-right or far-left government that challenges EU fiscal rules and sharply increases spending, risking antagonizing investors and the bloc.
Declining to comment specifically on the election, Lagarde said: “The ECB has to do what it has to do,” adding that she had always been “very alert” to any threats to price stability.
Brazil’s central bank governor Roberto Campos Neto said on the same panel that high debt levels and increased borrowing costs are starting to cause volatility in emerging markets. “It’s time for us to think globally about a way to get some sort of stable debt trajectory in the near term,” he said.