- Fed Chair Jerome Powell sounds the alarm on U.S. federal debt.
- The federal deficit is forecast to swell to $1.1 trillion.
- U.S. household debt reached a new record high in the third quarter.
Jerome Powell has presided over three interest rate cuts as Federal Reserve Chairman, but now believes debt is a problem. Of course, he’s referring to the federal deficit and not ballooning consumer debt that is being fueled by lower interest rates.
In prepared testimony, the Fed chief said U.S. debt is on an “unsustainable path” that could affect policymakers’ ability to respond to a real crisis.
Powell Admits that Federal Debt Is Unsustainable
In prepared testimony before the Joint Economic Committee on Wednesday, Powell said “the federal budget is on an unsustainable path, with high and rising debt.”
Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.
The 2019 federal budget Powell is referring to now has a deficit of around $1 trillion, the highest in seven years. Slowing economic growth and a lack of spending restraint in Washington has caused the deficit to swell uncontrollably. The 2020 budget deficit is expected to grow to $1.1 trillion.
Washington’s deficit is growing because government spending ($4.75 trillion) is higher than its revenue ($3.65 trillion). This shortfall was exacerbated after President Trump cut taxes but didn’t reduce government spending in commensurate fashion.
Ironically, Powell maintained an optimistic tone on the economy in his Wednesday testimony, telling Congress, “there’s no reason this expansion can’t continue.”
But if the economy were doing so well, the Fed wouldn’t be lowering interest rates. Rate cuts are employed during downturns to provide consumers and businesses with more incentive to spend money and grow the economy. A healthy economy needs interest rates to rise, not fall.
If a recession were to hit the U.S. economy, the Fed wouldn’t have an appropriate response. That’s because coming out of recession usually requires a 500-point reduction in the federal funds rate if conventional theories about the economy are to be believed.
Powell’s testimony on the economy will continue Thursday when he faces off before the House Committee on the Budget at 10:00 a.m. ET.
U.S. Household Debt Continues to Rise
Mortgage borrowing drove U.S. household debt sharply higher last quarter, with Americans now owing $13.95 trillion, according to the New York Fed’s quarterly household credit and debt report.
Household debt is now the highest on record and $1.3 trillion above the 2008 peak.
Mortgage borrowing in the third quarter increased $31 billion to $9.44 trillion, as more Americans refinanced their homes.
New York Fed research officer Donghoon Lee said,
households are taking advantage of a low-interest rate environment to secure credit.
Student debt jumped to $1.5 trillion. The value of new auto loans increased by $159 billion.