New government spending or tax cuts could aid the Federal Reserve’s efforts to boost the recovery, a Fed official said Tuesday, but at the “substantial cost” of raising the federal debt.
Fed governor Lael Brainard, speaking at an event in Washington just days before President-elect Trump takes control of the government, said that fiscal policies that only boost demand, such as tax cuts or stimulus spending, can help the Fed by generating higher interest rates but would also lead to “substantial increases in the debt-to-[gross domestic product] ratio.”
Federal debt held by the public is already 76 percent of U.S. economic output, and that ratio is projected to rise indefinitely, under current policies.
Brainard did not mention Trump by name but commented on the prospects for easier fiscal policy under the Republican. Trump has pledged to cut taxes and implement a major infrastructure spending program.
Fed officials have long called for more spending from Congress to aid their recovery efforts. On Tuesday, however, Brainard warned that such efforts could risk worsening the debt outlook if they only increase demand for goods and services. If, however, they boost productivity, for instance by increasing education, they would be more sustainable.
In recent months, Brainard has been among the Fed officials most supportive of keeping rates lower for longer. She has argued that inflation pressures are low, and inflation may not rise, as it has in the past, as unemployment falls.
But on Tuesday she noted that the data may be changing. “I am pleased to see that full employment is within reach and could prove sustainable with the right policy mix,” she said.
