The U.S. national debt — to the penny, according to the Treasury — reached $36,034,994,586,981.97 on November 11, 2024. It was the first time it reached that amount.
In a DealBook Summit interview, journalist Andrew Ross Sorkin asked Federal Reserve chair Jerome Powell about the national debt and whether the country was on the “knife’s edge” and about to tip over.
Typically, when Powell or others at the Fed receive questions, they’re about interest rates, when the next cut might occur, and how ongoing events and trends in the economy might affect them. They also tend to politely dodge the inquiries. Powell had already begged off commenting on various topics Sorkin raised that weren’t within the central bank’s purview.
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This time, it sounded as though Powell would step aside, but that changed.
“I did work on fiscal policy issues before I came to the Fed,” he said. “But at the Fed, we don’t have oversight over fiscal policy. Quite to the contrary, Congress has oversight over us, so I would limit myself to saying this, that the U.S. federal budget is on an unsustainable path. The debt is not at an unsustainable level, but the path is unsustainable. And we know that we have to change that. We’ve got to get back so that revenues and spending are in better alignment. We don’t need to pay the debt down. We don’t need to balance the budget. We just need the economy to grow faster than the debt, and that’s not happening. We’re running very large budget deficits at a time of full employment and strong growth. So, we need to address that and we’ve got to do it sooner or later and sooner is better than later.”
Sorkin followed up, asking if the Fed should ever take the debt and deficits into account when setting interest rates.
“No, never,” Powell said. “You see this in some emerging market countries. For example, if the central bank can’t raise rates to deal with inflation because the fiscal situation is so bad that they can’t raise rates, that’s called fiscal dominance. We’re so far from that. We’ll always use our tools to achieve price stability and maximum employment — 2% inflation. We’re not thinking about, ‘Oh, we’d better not raise rates because of the budget.’ If we ever get to that point … we’re far from that point.”
He trailed off for one of two reasons: because the problem was so remote as to be unworthy of consideration or close enough that he didn’t want to get into a discussion.
The biggest potential problem is a psychological one. At some point, investors — whether individual, institutional, or sovereign investors — will start to wonder if their money is safe. The more worried about risk, the more yield they’ll want on Treasury instruments, and the more interest payments will dominate spending. Currently, debt service is about 14% of national spending. The higher rates go, the more the category will dominate budgets.
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