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

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

Powell’s comments came in testimony before the House Financial Services Committee on Thursday, as the powerful Fed chairman concluded a second day of appearances on Capitol Hill.

“The US is on an unsustainable fiscal path, meaning debt is growing faster than the economy,” Powell said. ‘That is by definition untenable.’

Powell said the US has no problem paying off its debts for now, and that while there is no imminent threat of default, government debt will eventually have to fall below economic growth.

‘We will have to go back to where income and expenditure are better aligned. We don’t have to pay off the debt, we just need to grow the economy faster than the debt over a longer period of time,” he said.

Powell was primarily on the issue of inflation this week, which has soared to a 40-year high. In May, the consumer price index rose by 8.6 from a year ago, the highest figure since 1981.

Federal Reserve Chair Jerome Powell has said US public debt is on an 'unsustainable path' while admitting he underestimated the threat of inflation

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

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

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

In his comments on Thursday, Powell admitted that the Fed had “underestimated” the threat of inflation after insisting for much of last year that rising prices were transitory.

‘We underestimated it. In hindsight, we clearly did,” said Powell, explaining that the central bank had erroneously predicted supply chain shocks to be resolved quickly.

Inflation has been running high for a year now due to a combination of factors, with rising consumer demand colliding with supply chain disruptions and labor shortages as the economy reopened after the pandemic.

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

After being slow to acknowledge the inflation threat, the Fed has acted aggressively.

Last week, it raised its short-term benchmark by three-quarters of a percentage point – the largest increase since 1994 – and signaled that even bigger rate hikes are on the way. It also increased rates in March and May.

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US Federal Reserve Board Chairman Jerome Powell testifies Thursday before a House Financial Services Committee hearing in Washington

US Federal Reserve Board Chairman Jerome Powell testifies Thursday before a House Financial Services Committee hearing in Washington

Those rate hikes will make it more expensive for consumers and businesses to borrow for homes, cars and other durable goods.

Powell insisted that Americans insisted that Americans have confidence in the Fed, pointing to consumer confidence measurements showing that people generally believe inflation will eventually decline.

“People expect inflation to come back to levels consistent with our price stability mandate,” Powell told the House Financial Services Committee on the second of two days as part of the Fed’s semi-annual report to Congress.

‘But we have not yet had such a test. We haven’t had a long period of high inflation in a very long time. So it’s not a comfortable place to be.’

The Fed is taking on the risky challenge of shoving the US economy in for a so-called soft landing — raising interest rates and slowing the economy down enough to contain inflation without sliding it into recession.

On Wednesday, Powell had admitted to the Senate Banking Committee that a recession could remain as the Fed raises interest rates.

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

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Reassuring the public that inflation can be overcome is critical, Powell emphasized Thursday.

“Inflation expectations are anchored,” he told the House committee. ‘That’s good, but it’s not enough. We need to drive down inflation because it is inevitable that these expectations will come under pressure over time.”

He reiterated a promise that the Fed would do whatever it takes to succeed, saying the Fed’s commitment to contain inflation was “unconditional.”

“We cannot fail at this,” he said. ‘We really need to bring inflation down to 2 percent.’

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

‘We don’t have precision tools,’ he said, ‘so there is a risk that unemployment will rise, although historically a low level. 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 slow start to 2022.

Price pressures continued to mount for months, forcing the Fed to tighten its financial conditions in a bid to cool demand while hoping that some supply chain problems would begin to resolve in the coming months.

Last week, the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point — the largest increase since 1994 — to a range of 1.50 percent to 1.75 percent, and indicated its key rate would rise to 3.4 percent by the end of the year. this year.

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