Yellen warns that America's “fiscal dominance” risks exacerbating high debt or constraining the Federal Reserve's anti-inflation efforts

The Zhitong Finance App learned that a group of well-known economists said that the long-term risks brought about by expanding federal debt are the top issues facing the US economy. These risks include a scenario where the size of debt may cause the Federal Reserve to keep interest rates low in order to minimize debt service costs rather than curb inflation — a concept known as “fiscal dominance.” Former Treasury Secretary and Federal Reserve Chairman Janet Yellen said during a panel discussion at the American Economic Association's annual meeting in Philadelphia last Sunday that “the preconditions for a fiscal dominance are clearly growing.”

The Congressional Budget Office predicts that the federal deficit will reach 1.9 trillion US dollars this year, bringing the total debt to about 100% of GDP. This share is expected to rise to about 118% of GDP over the next decade.

Yellen also pointed out that President Donald Trump has “publicly asked” the Federal Reserve to clearly lower interest rates to reduce the government's debt service costs.

Yellen has previously said that if Trump succeeds in forcing the Federal Reserve to keep interest rates low to ease the burden of government debt, the US will face the risk of becoming a “banana republic.”

Former Cleveland Federal Reserve Chairman Loretta Meester, who spoke on the same panel, added that the “scariest” part of the current debt problem is that Trump administration officials don't seem to understand the threats involved.

“Even if ultimately no responsible action was taken to control the deficit, successive governments knew they were on the edge of a cliff,” she said. I think the current administration is probably unaware of the consequences.”

Still, Yellen said she hoped a crisis — perhaps the impending insolvency of social security and health insurance — would prompt Congress to reach a bipartisan agreement on budget reform.

“I doubt that Americans will eventually follow the path of fiscal dominance, but I do think the danger is real and should be monitored,” she said.

David Romer, an economist at the University of California at Berkeley, said he was “less optimistic” that a bipartisan agreement could avoid a “fiscal disaster.”

“We have financial problems,” Romer said. If we don't fix it, it's going to be a problem for everyone, including the Federal Reserve.”