Two Federal Reserve regional bank presidents said rising US government debt may impede efforts by the central bank to keep inflation in check.
Minneapolis Fed President Narayana Kocherlakota said on Tuesday inflationary expectations may rise if the public believes the central bank will print dollars to finance deficit spending.
Kansas City Fed President Thomas Hoenig said the US must cut spending and increase revenue so the central bank isn’t pressured to fund the “unsustainable” federal debt.
“It is a fact that the current outlook for fiscal policy poses a threat to the Federal Reserve’s ability to achieve its dual objectives of price stability and maximum sustainable long-term growth, and therefore is a threat to its independence as well,” Hoenig said in a speech in Washington.
Households may start to expect inflation will accelerate because government debt held by the private sector has increased more than 30 percent since the beginning of 2008, Kocherlakota said.
The administration of US President Barack Obama estimates budget deficits will total US$4.3 trillion during the next five years and hit a record US$1.6 trillion in the year ending on Sept. 30. The US must be “willing to disappoint a host of special interests” and tackle the debt, or it risks “its own next crisis,” Hoenig said.
“A government faced with rising debt levels must provide a credible long-term plan to re-establish fiscal balance,” Hoenig said in remarks at a policy forum hosted by the Peterson-Pew Commission on Budget Reform.
The budget commission, a venture of three organizations, is convening experts over a two-year period to make recommendations on US fiscal policy and the federal budget process, its Web site said.
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