Since becoming Federal Reserve chairman in 2018, Jerome Powell has consistently described America’s fiscal trajectory as “unsustainable.” He emphasizes that, while the Fed sets monetary policy and regulates banks, it does not control federal spending or tax decisions.
“We are not responsible for fiscal policy. But in the long run, fiscal policy will have a significant impact on the economy,” Powell said at a September 2018 Fed news conference. “There is no getting away from the fact that we have been on an unsustainable fiscal path for a long time.”
Despite repeated cautions, Powell acknowledges he cannot force a fiscal course correction. “It is not our job to advise [Congress],” he told reporters on May 7.
Mounting Deficits and Ratings Pressure
Powell’s warnings have become more urgent following Moody’s downgrade of U.S. sovereign debt from Aaa to Aa1. The ratings agency cited rising deficits and political gridlock. Extending the 2017 tax cuts would add roughly $4 trillion to the deficit over ten years, potentially pushing debt to 134% of GDP by 2035.
“While we recognize the United States’ economic and financial strengths, those strengths no longer fully offset the decline in fiscal indicators,” Moody’s said.
White House Pushes Back
The administration and congressional allies have downplayed the downgrade. White House Press Secretary Carolyn Levitt said Moody’s view contrasts with global investor confidence and pointed to strong inflows following the president’s Middle East trip. Treasury Secretary Scott Bessant called the downgrade “a lagging indicator,” noting much of the debt was incurred before recent months.
Stephen Milan, chair of the White House Council of Economic Advisers, stressed the administration’s commitment to deficit reduction. He argued that tax cuts would spur growth, adding:
“If our policies succeed in increasing GDP growth to 3%, fiscal revenues could increase by about $4 trillion over the 10-year budget period—more than a percentage point less than the deficit.”
Fed Officials Watch Debt Impact
Powell’s colleagues express similar concerns. Atlanta Fed President Raphael Bostic said, “These things have an impact on prices in the future, and we have to watch.”
Meanwhile, investors expect the Fed to lower its benchmark rate twice this year, starting in September. President Trump has publicly urged Powell to cut rates, a point of contention between the White House and the Fed.
Longstanding Concerns Over Entitlements and Aging Population
Powell has long highlighted the strain of entitlement programs—Medicare, Medicaid, Social Security—and rising interest costs. At the Kansas City Fed’s Jackson Hole symposium in August 2018, he warned that an aging population intensifies pressure on the federal budget.
“As more of our population retires, it becomes increasingly important to address the federal budget deficit,” he said.
He reiterated in April that focusing solely on discretionary spending cuts without touching entitlements would fail to resolve the debt challenge.
Powell’s repeated “unsustainable” fiscal warnings underscore a growing divide between the Fed’s monetary responsibilities and the fiscal choices left to Congress and the White House. With debt levels soaring and ratings agencies sounding alarms, debate over tax, spending, and long-term entitlement reform is likely to intensify.
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