"The newly-named Federal Reserve chairman faces an historic challenge that no predecessor has encountered since the years immediately following World War II. In that period, the gigantic spending required to aid our allies and secure military victory saddled the U.S. with towering debt. President Truman-fearing that huge interest costs would swamp the budget-heavily pressured the Fed to hold down rates. Today, the U.S. is wrestling with its biggest budget crisis in 70 years, and we're confronting a similar conundrum."
""The interest costs on the debt will be the big tussle between the Fed and the administration," John Cochrane, a noted economist at Stanford's Hoover Institution, told Fortune. "If you're the fire department, and someone else pours gasoline on the fire [meaning via a fiscal policy of huge deficits] you'll have hard time putting it out.""
The U.S. faces a postwar-scale fiscal challenge as rising interest payments increasingly burden the federal budget. Gigantic interest payments now consume one in five tax dollars, and the CBO projects interest costs will exceed Medicare by 2035. Higher interest rates would increase the cost of every new trillion in borrowing, accelerating deficits and deepening the interest-expense spiral. President Trump urges lower rates primarily to restrain interest costs and maintain the U.S. as an attractive low-cost investment destination. Economists warn that large fiscal deficits limit the Fed's ability to combat inflation, creating a policy tug-of-war.
Read at Fortune
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