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The stories that matter about money and politics in the race for the White House
The Federal Reserve chairman has warned that the US economy is too strong to justify such high deficits and has called on Washington to tackle the budget deficit “sooner rather than later”, in a sign of growing concern among monetary policymakers about skyrocketing government spending.
Jay Powell warned that the Biden administration was taking excessive risks by “running a very large deficit at a time when we are at full employment” and said “you cannot sustain these levels for long in good economic times.”
The unemployment rate in the world’s largest economy has not risen above 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 Tuesday.
Powell said at the European Central Bank conference in Sintra, Portugal: “Our debt levels are entirely sustainable, but the path we are on is unsustainable.”
His comments come amid mounting concerns about the national debt. Both Presidents Joe Biden and Donald Trump campaigned on promises that make it unlikely they will reduce the deficit, regardless of who wins the November election.
US manufacturing has grown faster than other major developed economies since the Covid-19 pandemic, but the budget deficit is still larger than G7 countries despite unemployment hovering near record lows.
The Congressional Budget Office now expects the U.S. budget deficit to hit $1.9 trillion this year, or 7 percent of GDP, up from a February forecast of $1.5 trillion. It projects the debt-to-GDP ratio will hit 122 percent in 2034, easily surpassing the post-World War II high of 106 percent.
There is growing concern about the US’s rapidly growing national debt, which is expected to reach 99 percent of GDP this year.
Trump’s plans to make his 2017 tax cuts permanent would add nearly $5 trillion to budget deficits over the next 10 years.
People in Trump’s camp have threatened to replace Powell as Fed chair if he returns to the White House. However, Powell said, “There is very broad support for an independent Fed in both political parties on both sides of Capitol Hill … where it really matters.”
The Fed chairman welcomed the recent drop in his favorite measure of U.S. inflation 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 cutting interest rates. U.S. borrowing costs fell slightly in response, with the yield on the 10-year Treasury note down 3 basis points to 4.44 percent.
Governments have increased their debt burdens in recent years as they spent huge sums to support households and businesses in response to the pandemic and the energy crisis that followed Russia’s large-scale invasion of Ukraine.
Central bankers are now worried that politicians are being too slow to cut spending, which could jeopardize financial stability and keep inflation high.
ECB President Christine Lagarde only partially endorsed Powell’s comments. She stressed that EU governments must comply with new rules on public debt by limiting their deficits. She also urged them to support growth and productivity through targeted investment and structural reforms.
Financial markets are wary of the risk that early parliamentary elections in France could produce a far-right or far-left government that would challenge EU budget rules and significantly increase spending, potentially creating a standoff with investors and the EU.
Lagarde declined to comment specifically on the election, saying: “The ECB must do what it has to do,” while adding that she was always “very alert” to any threats to price stability.
Speaking on the same panel, Brazil’s central bank governor Roberto Campos Neto said high debt levels and increased borrowing costs were starting to create volatility in emerging markets. “It’s time for us globally to think about how to get some kind of stable debt trajectory in the near future,” he said.