Federal Reserve Chair Jerome Powell’s warning about the “unsustainable” national debt is raising questions about the depth of the country’s fiscal woes among some economists who see the Fed as part of the problem.
Powell warned in an interview released Sunday that the U.S. is on a dangerous path after running up a $34 trillion national debt, which reached new heights after pandemic-era spending.
“In the long run, the U.S. is on an unsustainable fiscal path. The U.S. federal government is on an unsustainable fiscal path. And that just means the debt is growing faster than the economy,” Powell said in an interview with “60 Minutes.”
Powell’s comments came after a year of budget standoffs and a near debt default that ended with a credit downgrade by the ratings agency Fitch but no significant moves to reduce budget deficits.
The Congressional Budget Office (CBO) says federal spending will increase from 24 percent of GDP in 2023 to 29 percent of GDP in 2053, while revenues are expected to increase less over that period, from 18 percent to 19 percent of GDP.
“Outlays increase faster than revenues — mainly because of rising interest costs and growth in spending on the major health care programs and Social Security. The result is ever-larger budget deficits over the long term,” the CBO’s latest long-term budget outlook says.
The highly polarized political environment has contributed to questions about the nation’s fiscal health and raised questions about America’s ability to pay its debts. Fitch Ratings downgraded the U.S. credit rating from “AAA” to “AA+” in August after President Biden and House Republicans struck a deal to raise the debt ceiling limit just days before the country was set to default last spring.
“Part of the story there was the governance and political side, kind of the inability to come to compromises and actually tackle the underlying fiscal position. And, yes, the fiscal position has gotten worse and it continues to worsen,” Richard Francis, the co-head of the Americas sovereign ratings, told The Hill.
Lawmakers on both sides of the aisle have raised concerns about the sustainability of the national debt, but they remain divided over how to tackle it and how urgent the problem ranks.
“We’re nearing the point of a tipping point where this country cannot sustain the fiscal levels that we see now and cannot service our debt and continue to honor obligations to the American people,” Rep. John Rose (R-Tenn.) said Tuesday during a House Financial Services Committee hearing with Treasury Secretary Janet Yellen.
Sen. John Fetterman (D-Pa.) told The Hill he was “certainly keeping an eye on it” but noted other pressing issues on Capitol Hill.
“Of course we want to minimize the amount of debt,” Fetterman said Tuesday. “But right now, here we have an even better focus, and that is border security and all the other things for Ukraine, Taiwan, Israel, all of those.”
Congress has passed three short-term spending bills since the Fitch downgrade, with the next deadlines approaching on March 1 and March 8, a move Francis said underscores “the deterioration in governance.”
“The fact that they can’t even come up with appropriations bills and have to rely on this continuing resolution speaks negatively,” he added. When asked whether Fitch would consider another downgrade in the future, however, he noted that “now that we’ve downgraded, we might have a little more tolerance.”
Powell has urged Congress to tackle the debt throughout his tenure as Fed chief.
Powell called on lawmakers in February 2020 to curb spending while the economy was strong and give the government more fiscal space to respond to a crisis. One month later, Congress passed its first tranche of trillions of dollars for COVID-19 response and economic relief.
Few economists question the wisdom of responding to the pandemic-driven recession with aggressive stimulus. But Powell and the Fed have also exacerbated that burden with a spate of aggressive interest rate hikes, which makes paying for the national debt more expensive.
“The latest Congressional Budget Office outlook tells us that they’ve revised upward their projections for the deficit over the next ten years and for the debt-to-GDP ratio. They say very plainly that the single biggest driver of the increase … is the rate hikes. It’s interest expenditure. Who’s responsible for that? Who’s doing that? That’s the Fed,” Stony Brook University economist Stephanie Kelton, a proponent of the debt-skeptical Modern Monetary Theory, told The Hill.
Total U.S. debt stock is $34 trillion while the debt-to-GDP ratio is about 120 percent, having jumped up roughly 20 percentage points in the aftermath of the pandemic from a previous level of about 100 percent.
“The breaking point would be [if] there not enough people willing to lend funds to the U.S. government, or [if] borrowing becomes more risky to the point where the U.S. would have to pay an even higher premium, pay an actual risk premium, on money that’s being borrowed,” said Jonathan Ernest, an assistant professor of economics at Case Western Reserve University.
“We don’t seem to have approached anywhere near that yet. We’re kind of feeling our way out into new territory as this debt continues to mount higher and higher,” he added.
Other economists see more uncertainty around when the deficit tips into true problem territory.
“Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt,” University of Pennsylvania economist Kent Smetters wrote in an analysis last fall.
The Fed has been hiking interest rates in response to inflation, though it’s not clear whether they’ve worked as intended. But the fact the hikes add meaningfully to the deficit leads some experts to view them as simply too blunt a policy tool for the modern economy.
“Tighter financial regulation is an alternative, non-interest rate monetary policy tool,” economic writer and researcher Nathan Tankus told The Hill. “If we’re worrying about fiscal ‘unsustainability,’ that much more directly implies that the Fed should be using tighter financial regulation to tighten financial conditions [more than makings suggestions] about what Congress should be doing about spending.”
If interest rates are set in such a way that interest payments are never growing faster than the economy, then the unsustainability problem goes away and other methods for managing inflation become more necessary, Tankus said.