Powell: U.S. debt is 'on unsustainable path,' crimping ability to respond to recession


Fed to Congress: It may soon be your turn to save the economy so get your finances in better shape.

Federal Reserve Chairman Jerome Powell plans to warn lawmakers Wednesday that the ballooning federal debt could hamper Congress's ability to support the economy in a downturn, urging them to put the budget "on a sustainable path."

Powell suggested such fiscal aid could be vital after the Fed has cut its benchmark interest rate three times this year, leaving the central bank less room to lower rates further in case of a recession.

"The federal budget is on an unsustainable path, with high and rising debt," Powell said in prepared remarks he planned to deliver at 11 a.m. Wednesday before the Joint Economic Committee. "Over time, this outlook could restrain fiscal policymakers' willingness or ability to support economic activity during a downturn."

Powell also reiterated that the Fed is likely done cutting rates unless the economy heads south.

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The testimony marks a more aggressive tone for Powell, who generally has steered clear of lecturing lawmakers on the hazards of the federal deficit. But after raising its key rate nine times since late 2015, the Fed has lowered it three times this year to head off the risk of recession posed by President Trump's trade war with China and a sluggish global economy.

The Fed's benchmark rate is now at a range of 1.5% to 1.75%, above the near-zero level that persisted for years after the Great Recession of 2007-09 but below the 2.25% to 2.5% range early this year.

"Nonetheless, the current low interest rate environment may limit the ability of monetary policy to support the economy," Powell said in his prepared testimony. Fed officials have said they still have ammunition to fight a slump, including lowering rates and resuming bond purchases.

The federal budget deficit hit $984 billion in fiscal 2019, the highest in seven years, and it's expected to top $1 trillion in fiscal 2020. The federal tax cuts and spending increases spearheaded by Trump have added to the red ink and are set to add at least $2 trillion to the federal debt over a decade. The national debt recently surpassed $23 trillion.

Powell said a high and rising federal debt also can "restrain private investment and, thereby, reduce productivity and overall economic growth." That's because swollen debt can push interest rates higher.

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"Putting the federal budget on a sustainable path would aid in the long-term vigor of the US economy and help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy if it weakens," Powell said in the prepared text.

Many economists are forecasting a recession next year, though the risks have eased now that the U.S. and China appear close to a partial settlement of their trade fight and the odds of a Brexit that doesn't include a trade agreement between Britain and Europe have fallen.

Powell also said he Fed is unlikely to reduce interest rates further unless the economy weakens significantly -- a message he delivered after the central bank trimmed its federal funds rate for a third time late last month.

"We see the current stance of monetary policy as likely to remain appropriate" as long as the economy, labor market and inflation remain consistent with the Fed's outlook, Powell said in the testimony.

Since last month's Fed meeting, the government has reported that employers added 128,000 jobs last month -- a surprisingly strong showing in light of a General Motors strike and the layoffs of temporary 2020 census workers.

"Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly," Powell said.

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This article originally appeared on USA TODAY: Interest rates: Powell tells Congress federal debt is 'unsustainable'


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  • Dr. Donald D.A. Schaefer
    (2019-11-13 23:08:18Z)

    Please consider adding my recently published article through the Campbell Law Review journal entitled, “The United States' National Debt and the Necessity to Prepare for its Default” to your web site. Here is the link: https://scholarship.law.campbell.edu/clr/vol41/iss2/3/ .

    In many ways, the 2008 financial crisis seems like a distant memory one that many would just as soon forget. Another financial crisis is coming that will make the 2008 crisis pale in comparison. The future financial crisis lies in the massive national debt that has now passed the $22 trillion mark. The national debt continues to grow dramatically and, within the next few years, will surpass $25 trillion. Its growth is fueled by the inability of members of Congress and the Executive to address Social Security, Medicare, defense spending, and taxes. The resulting crisis may portend the collapse of the largely unregulated derivative markets that, by some estimates, are between $600 trillion and over $1 quadrillion. The future of the United States lies in the members of Congress and the Executive's ability to be prepared to default on its debt under domestic and international law so that, when this event happens, the crisis can be mitigated.

    Best wishes,

    Dr. Donald D.A. Schaefer


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