Rising Fiscal Dominance Risk Poses Pressure on the US Federal Reserve

On Thursday, Janet Yellen, former U.S. Treasury Secretary and former head of the Federal Reserve (Fed), warned about the growing risk of fiscal dominance in the American economy. This condition arises when fiscal policies significantly interfere with monetary markets, limiting the central bank's ability to make its own decisions. Yellen pointedly cited President Trump’s public support for lower interest rates as a sign of this increasing trend. The former secretary highlighted that while the risk remains, the current situation is manageable and notes that spending on interest payments are nearing the share of the defense budget. According to Yellen, the Fed continues to make adequate decisions but the future scenario is concerning, especially with rising public debt and demographic and cost factors pressuring an increase in the debt-to-GDP ratio by 2030. The growing risk of fiscal dominance has direct implications for the balance between fiscal and monetary policy, potentially affecting economic stability in the United States. Yellen’s analysis on this issue underscores the importance of effective coordination among different government sectors to ensure financial sustainability and macroeconomic health.