THE United States fiscal situation is on an “unsustainable trajectory” due to a lack of political will to resolve the crisis at a time when the cost of debt is soaring, said former Federal Reserve Bank of New York President Bill Dudley.
“It’s going to get worse because the government debt is going to be repriced at much higher interest rates than we’ve had in the last 15 years,” Dudley, who is also a columnist for Bloomberg Opinion and a senior economic adviser for Bloomberg Economics, said via video call at a conference in Sydney.
He also pointed to skyrocketing health care and Social Security costs as the baby boom generation retires, further worsening the fiscal outlook.
“One last problem we have is the political problem. We don’t currently have a very functional government in the United States to get things done,” Dudley added. “We are absolutely on an unsustainable trajectory.”
Confidence in global markets has been hit by ongoing concerns about the U.S. government’s finances and its need for new debt. Last week saw one of the worst 30-year bond auctions in a decade and Friday ended with a warning from Moody’s Investors Service that it was inclined to downgrade the country amid deficits larger budgets.
The risk of a government shutdown as early as this week also looms, although it could now ease.
Dudley, a senior fellow at Princeton University’s Center for Economic Policy Studies, said policymakers are still questioning whether rates are restrictive enough to bring down inflation, following a 5.25 point rise in percentage.
The US central bank took a break at its last two meetings, prompting financial markets to anticipate cuts from the middle of next year.
Fed officials have repeatedly stressed that they are in no rush to cut rates, with their clear priority being to continue to curb inflation. That will be a key topic Tuesday when economists expect the Labor Department to report that growth in the consumer price index slowed to an annual rate of 3.3% in October from 3.7%. in September.
Dudley added that the Fed is unlikely to cut rates as quickly as markets expect.
“The real thing to focus on is the labor market,” he said. “The Fed probably needs a little more easing in the labor market to bring wage inflation back to a level consistent with 2% inflation.”