WASHINGTON — Two Federal Reserve regional bank presidents said rising U.S. government debt may impede efforts by the central bank to keep inflation in check.
Minneapolis Fed President Narayana Kocherlakota said Tuesday that inflationary expectations may rise if the public believes the central bank will print dollars to finance deficit spending.
Kansas City Fed President Thom as Hoenig said the U.S. must cut spending and increase revenue so the central bank isn’t pressured to fund “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.
Colorado is part of the Kansas City bank’s region.
The Fed’s preferred price gauge, tracking consumer spending and excludes food and fuel costs, will rise 1.3 percent this year, the smallest gain since 1964, according to the median estimate of economists surveyed by Bloomberg News.
Households may start to expect that inflation will accelerate because government debt held by the private sector has increased more than 30 percent since the beginning of 2008, Kocherlakota said.
“This debt can only be paid by tax collections or by the Federal Reserve’s debt monetization, that is, by printing dollars to pay off the obligations incurred by Congress,” he said. “If households begin to expect that the latter will be true — even if it is not — their inflationary expectations will rise as well.”
The White House estimates budget deficits will total $4.3 trillion during the next five years and hit a record $1.6 trillion in the year ending Sept. 30.
