Yellen warns of rising US fiscal dominance risks

Former US Treasury Secretary and Federal Reserve Chair Janet Yellen warned on Sunday that the risk of long-term fiscal dominance in the US is rising as government debt continues to mount.

"Fiscal dominance" refers to a situation in which fiscal pressures from high government debt constrain monetary policy, forcing the central bank to prioritize debt sustainability over price stability.

Yellen made the remarks during a panel discussion at the American Economic Association's annual meeting in Philadelphia. She said that the preconditions for fiscal dominance are clearly strengthening. She also noted that US President Donald Trump has publicly called on the Federal Reserve to cut interest rates in order to ease the government's debt-servicing burden.

Yellen has previously issued a stark warning that if Trump were to succeed in pressuring the Federal Reserve to use low interest rates to relieve government debt stress, the US could risk degenerating into a "banana republic", a term referring to poor countries characterized by political instability, reliance on a single economic sector, and severe inflation.

According to projections by the Congressional Budget Office, the US federal deficit will reach as high as US$1.9 trillion (HK$14.82 trillion) this year, pushing total debt to about 100 percent of gross domestic product, and is expected to rise further to 118 percent over the next decade.

Though Yellen warned that the risks are serious, she still believed that as Social Security and Medicare approached insolvency, the crisis could serve as a catalyst forcing Congress to reach a bipartisan budget reform agreement. 

"I doubt Americans will end up on the fiscal dominance course, but I definitely think the dangers are real and should be monitored," she said.

Cynthia ZHONG