Wednesday, October 27, 2021

Yellen: US may have to borrow more to balance debt

By Sarah Harvey, CNN

Federal Reserve Chair Janet Yellen says that the US Treasury Department will have to start finding new ways to manage the nation’s debt — and the country might have to borrow more to do so — by Oct. 18.

“I believe that we are at probably the limits of what can be done for general government debt management, and that it will very likely have to be managed more narrowly,” Yellen said at an International Monetary Fund conference in Washington, DC.

Yellen added that the eventual government “debt operation” in October would probably involve taking money out of the central bank’s balance sheet or increasing the stock of US Treasuries — but she did not say which mechanism was being considered.

Also Monday, a source close to Treasury Secretary Steven Mnuchin told CNN that a White House meeting held last month with lawmakers on the debt ceiling and debt limit resulted in “remarks to the effect of fiscal caution.”

“He and the White House [officials] were not optimistic for positive outcomes during any of the meetings and the thought was to leave all of the options open,” the source said.

That source said Mnuchin suggested changes to the congressional passage process would make it easier to boost the country’s borrowing limit, and that Mnuchin remains open to such a change in the future.

The sources spoke on condition of anonymity because Mnuchin’s position does not allow him to comment publicly on the conversations.

The central bank chief did stress, however, that the US economy is heading into a more “neutral” scenario, in which both economic growth and inflation levels remain steady.

She said that raises the likelihood that the Fed will need to revise its outlook for the economy and interest rates, including increasing the possibility that one of the two rate hikes made in 2019 could come as soon as May, which would be below the official rate target of 2%.

The IMF has long been urging the US to tackle its skyrocketing public debt levels, and last year singled out public debt sustainability as one of its top priorities.

When the central bank raises interest rates, the higher borrowing costs associated with the policy ripple through the economy and help put up barriers to economic growth.

Yellen said, however, that the nation’s current economic climate offers some opportunities for the government to rethink its approach to borrowing — rather than just raising taxes.

“The US is quite lucky, in my view, in the way in which we have arranged things,” she said. “I think the conversation has to be about what the next steps should be on the debt side.”

By 2020, the national debt is expected to reach about 125% of GDP, according to the White House, when adjusted for inflation.

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