Fed Chair Jerome Powell warns government debt is on an unsustainable path

Federal Reserve Chairman Jerome Powell has said that US government debt is on an ‘unsustainable path’ while admitting that he underestimated the threat of inflation and warning that a recession is possible.

Powell’s remarks came in testimony before the House Financial Services Committee on Thursday, as the powerful Fed chair wrapped up a second day of appearances on Capitol Hill.

‘The US is on an unsustainable fiscal path, meaning the debt is growing faster than the economy,’ said Powell. ‘By definition, that is unsustainable.’

Powell said that for now, the US has no issue servicing its debt, and that although there is no imminent threat of default, eventually government debt will have to drop back below economic growth.  

‘We will need to get back where revenues and spending are better aligned. We don’t need to pay the debt down, we just need to have the economy growing faster than the debt over a longer time,’ he said.

Powell was in the hot seat this week primarily over the issue of inflation, which has soared to a 40-year high. In May, the consumer price index jumped 8.6 from a year ago, the fastest rate since 1981.

Federal Reserve Chairman Jerome Powell has said that US government debt is on an ‘unsustainable path’ while admitting that he underestimated the threat of inflation

Federal debt as a share of the US economy is seen from the late 1960s to the present

Federal debt as a share of the US economy is seen from the late 1960s to the present

In his remarks Thursday, Powell admitted that the Fed had ‘underestimated’ the threat of inflation, after spending much of last year insisting rising prices were transitory.

‘We did underestimate it. With the benefit of hindsight, clearly we did,’ Powell said, explaining that the central bank had incorrectly predicted that shocks to the supply chain would be resolved quickly.

Inflation has been running hot for a year now due to a confluence of factors, with surging consumer demand running up against supply chain disruptions and labor shortages as the economy reopened from the pandemic. 

President Joe Biden’s $1.9 trillion stimulus last year added heat to an economy that was already boiling, as many committee Republicans emphasized in Thursday’s hearing. 

After being slow to recognize the inflation threat, the Fed has been moving aggressively. 

Last week, it raised its benchmark short-term interest rate by three-quarters of a percentage point – its biggest hike since 1994 – and has signaled that more sizable rate hikes are coming. It also raised rates in March and May. 

U.S. Federal Reserve Board Chair Jerome Powell testifies before a House Financial Services Committee hearing in Washington on Thursday

U.S. Federal Reserve Board Chair Jerome Powell testifies before a House Financial Services Committee hearing in Washington on Thursday

Those rate increases will make it costlier for consumers and businesses to borrow, for homes, cars and other long-lasting goods. 

Powell insisted that Americans insisted that American’s have confidence in the Fed, pointing to measures of consumer sentiment showing that people generally think inflation will eventually subside.

‘People do expect inflation to come back down to levels that are consistent with our price stability mandate,’ Powell told the House Financial Services Committee on the second of two days of testimony as part of the Fed´s semiannual report to Congress. 

‘But we haven´t had a test like this. We haven´t had an extended period of high inflation for a long time. So it´s not a comfortable place to be.’

The Fed is pursuing the high-risk challenge of gliding the U.S. economy in for a so-called soft landing – raising rates and slowing the economy enough to tame inflation without sending it tumbling into a recession. 

On Wednesday, Powell had acknowledged to the Senate Banking Committee that as the Fed drives rates higher, a recession remains possible.

‘It’s not our intended outcome,’ he said. ‘But it´s certainly a possibility.’

Reassuring the public that inflation can be conquered is critically important, Powell stressed Thursday.

‘Inflation expectations are anchored,” he told the House committee. ‘That´s good, but it´s not enough. We need to get inflation down because inevitably, over time, these expectations are going to be under pressure.”

He repeated a pledge that the Fed would do whatever it takes to succeed, saying the Fed’s commitment to controlling inflation was ‘unconditional’.

‘We can´t fail on this,’ he said. ‘We really have to get inflation down to 2 percent.’

Under questioning by members of the House panel on Thursday, Powell said there was a risk the Fed’s actions could lead to a rise in unemployment. The U.S. jobless rate stood at 3.6 percent in May.

‘We don’t have precision tools,’ he said, ‘so there is a risk that unemployment would move up, from what is historically a low level though. A labor market with 4.1 percent or 4.3 percent unemployment is still a very strong labor market.’

At the same time, however, Powell said he expects economic growth to pick up in the second half of the year after a sluggish start to 2022.

Price pressures have continued to build for months, forcing the Fed to ramp up its tightening of financial conditions in an attempt to cool demand while hoping that some supply chain issues begin to untangle over the next few months.

Last week, the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point – its biggest hike since 1994 – to a range of 1.50 percent to 1.75 percent, and signaled its policy rate would rise to 3.4 percent by the end of this year.

Read more at DailyMail.co.uk

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