There is one subject where Federal Reserve Chair Jerome Powell has been consistent since becoming central bank boss nearly seven years ago: The nation’s fiscal path is “unsustainable.”
It’s a word he has come back to again and again in describing US deficits, making his views well known on the subject despite acknowledging he does not set the nation’s fiscal policy and the Fed is in no position to fix the problem.
The Fed’s mandate is to set monetary policy and regulate banks while staying out of Washington, D.C., fiscal matters.
“We don’t have responsibility for fiscal policy. But in the longer run, fiscal policy will have a significant effect on the economy,” Powell said during a Fed press conference in September 2018, eight months after becoming chair.
“We have been on an unsustainable fiscal path for a long time, and there is no hiding from it,” he added. “In the end, we will have to face that — and the sooner the better.”
Nearly seven years later, Powell is using the same language. On April 16, he said, “We’re running very large deficits at full employment, and this is a situation that we very much need to address.”
Just last week, on May 7, he added that the debt is “on an unsustainable path and it’s on Congress to figure out how to get us back on a sustainable path.”
But “it’s not up to us to give them advice,” he added.
The question of the US fiscal path has taken on new urgency after Moody’s became the latest ratings agency to strip the US of its top AAA rating.
The agency on Friday wrote that if Congress extends President Trump’s 2017 tax cuts, as the GOP wants to do, it will add around $4 trillion to the deficit over the next decade, adding that the result could be a debt burden of 134% of GDP by 2035.
“While we recognize the US’ significant economic and financial strengths,” Moody’s added in a statement that noted the fiscal situation was the result of successive administrations, “we believe these no longer fully counterbalance the decline in fiscal metrics.”
Both the White House and its congressional allies have taken pains to appear unfazed by the development, with lawmakers even taking a step forward Sunday night on the package after Moody’s directly cited the ongoing effort in its Friday statement.
White House press secretary Karoline Leavitt said Monday that President Trump disagrees with Moody’s, noting that the world has confidence in the US and that the administration secured trillions in investment from its Middle East trip last week and since Trump took office.
Levitt also noted that inflation measured by producer prices dropped last week.
Treasury Secretary Scott Bessent called the Moody’s downgrade a “lagging indicator,” noting that the amount of debt the US is carrying wasn’t all accumulated over the past 100 days.
Stephen Miran, chair of the White House Council of Economic Advisers, added Monday that getting the deficit down is important.
“I do want to assure everyone that the deficit is a very significant concern for this administration, and we’re determined to bring it down and to undo the damage to the fiscal health of the United States,” he said.
He said passing the tax bill will ignite economic growth to the tune of 4.2% to 5.2% over the next four years, 2.9% to 3.5% over the long run, and create roughly 7 million new jobs while boosting real wages by $6,000 to $11,000 per worker. He says the tax revenue collected from boosting economic growth and jobs can reduce the deficit by over a percentage point.
“If our policies are successful in bringing GDP growth to 3%, that can improve revenues by about $4 trillion over the course of a budget decade. So that’s well over a point off the deficit,” Miran said.
Powell did not make any comments Monday about the new Moody’s downgrade.
One of his colleagues, Atlanta Fed president Raphael Bostic, said, “We have to see how this plays out. I try not to target a rating for the US government, but these things will have implications for prices down the road that we’ll have to pay attention to.”
Powell and President Trump have had differing opinions on another issue that is within Powell’s control: interest rates.
As during his first term in office, President Trump has been a vocal critic of Powell while encouraging the Fed chair to cut interest rates as recently as this past weekend after the central bank this month elected to keep its benchmark interest rate unchanged in a range of 4.25%-4.50%.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
Investors expect the Fed will cut rates twice this year, beginning in September.
Powell’s term as Fed chair is set to expire next May; his term on the Fed’s Board of Governors runs through January 2028.
While Powell has repeatedly said that bringing down the debt is not the Fed’s issue, he has suggested that politicians ought to focus on entitlement programs — Medicare, Medicaid, Social Security, and now interest payments — as opposed to discretionary spending to whittle down the debt load.
“When people are focusing on cutting domestic spending, they’re not actually working on the problem,” he said on April 16.
Powell expressed concerns about the shrinking tax base/larger entitlement situation that comes from an aging population as early as his first 2018 speech as chair to the symposium in Jackson Hole, Wyo., sponsored by the Federal Reserve Bank of Kansas City.
“Addressing the federal budget deficit, which has long been on an unsustainable path, becomes increasingly important as a larger share of the population retires,” he said then.
When asked about those comments a month later in September 2018, he said, “It’s no secret: It’s been true for a long time that with our uniquely expensive healthcare delivery system and the aging of our population, we’ve been on an unsustainable fiscal path for a long time. And there’s no hiding from it.”
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