Fed Chair Powell Warns of ‘Unsustainable’ Budget as US National Debt Crosses $26 Trillion

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In his testimony before the Senate banking committee, Federal Reserve Chairman Jerome Powell warned Congress that the U.S. federal budget has been on an unsustainable path for years. He added that the U.S. economy is facing a deep downturn with “significant uncertainty.”

‘Unsustainable Path’

The Federal Reserve chairman testified before the Senate banking committee on Tuesday. While acknowledging that the federal spending is giving the economy a short-term boost during the coronavirus pandemic, he warned Congress that the U.S. economy faces a deep downturn with “significant uncertainty” about the timing and strength of a recovery.

“The levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery,” Powell was quoted as saying. He suggested that investors should not overreact to surprisingly good economic data, such as the May retail sales report. The chairman elaborated:

The United States federal budget has been on an unsustainable path for years now … the debt is growing faster than the economy, so debt-to-GDP is rising. That is, by definition, unsustainable.

The Congressional Budget Office said that the U.S. deficit soared to $1.9 trillion for the first eight months of the fiscal year, and is expected to hit a record $3.7 trillion this year. The current record for a fiscal year deficit is $1.41 trillion; it was set in 2009.

“Every generation is entitled to spend what it wants to spend on the things it thinks it needs, but it really ought to pay for them, in some sense, rather than passing the bills onto the kids,” Powell continued. “Over time, future generations – our kids and our grandkids – their tax dollars will be going to servicing the debt that we incurred to buy the stuff we wanted when we were in charge.”

While emphasizing that the U.S. has a lot of borrowing capacity, he said: “we need to get back on a sustainable path.” He added that until the public is confident the [covid-19] disease has been contained, “a full recovery is unlikely.”

Congress has recently authorized approximately $3 trillion in spending to respond to the covid-19 pandemic, which includes the $2.2 trillion CARES Act President Trump signed into law in March. Meanwhile, the U.S. national debt also recently surpassed the $26 trillion mark.

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