A panel of prominent economists has identified the long-term risks stemming from the ballooning federal debt as the paramount issue facing the U.S. economy. These risks include a potential scenario where the sheer scale of the debt could pressure the Federal Reserve to prioritize minimizing government borrowing costs by keeping interest rates low, rather than focusing on curbing inflation—a concept known as "fiscal dominance."
Former Treasury Secretary and Federal Reserve Chair Janet Yellen stated during a panel discussion at the American Economic Association's annual meeting in Philadelphia that "the preconditions for fiscal dominance are clearly growing." The Congressional Budget Office projects this year's federal deficit will hit $1.9 trillion, pushing the total debt to approximately 100% of GDP.
This ratio is expected to climb to about 118% of GDP over the next decade. Yellen also pointed out that President Donald Trump has "publicly called for" the Fed to explicitly cut interest rates to reduce the government's debt servicing costs.
Yellen has previously warned that if Trump successfully pressures the Fed into maintaining low rates to ease the government's debt burden, the U.S. risks becoming a "banana republic." Adding to the conversation, former Cleveland Fed President Loretta Mester, who spoke on the same panel, noted that the "scariest" part of the current debt problem is that officials in the Trump administration seem not to grasp the threats involved.
"Even if they ultimately didn't take responsible action to control the deficit, previous administrations knew they were standing at the edge of a cliff," she said. "I don't think this administration may realize the consequences."
Despite the grim outlook, Yellen expressed hope that a crisis—perhaps the impending insolvency of Social Security and Medicare—could spur Congress to reach a bipartisan agreement on budget reform. "I doubt that Americans will ultimately go down the path of fiscal dominance, but I do think the dangers are real and should be monitored," she stated.
Economist David Romer from the University of California, Berkeley, offered a bleaker perspective, saying he is "less optimistic" that a bipartisan deal can avert a "fiscal disaster." "We have a fiscal problem," Romer said. "If we don't fix it, it's going to cause problems for everyone, including the Fed."
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