Powell suggested such fiscal aid could be vital after the Fed has cut its benchmark interest rate three times this year, leaving the central bank less room to lower rates further in case of a recession.
“The federal budget is on an unsustainable path, with high and rising debt,” Powell told the Joint Economic Committee. “Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.”
Powell also reiterated that the Fed is likely done cutting rates unless the economy heads south.
The testimony marks a more aggressive tone for Powell, who generally has steered clear of lecturing lawmakers on the hazards of the federal deficit. But after raising its key rate nine times since late 2015, the Fed has lowered it three times this year to head off the risk of recession posed by President Donald Trump’s trade war with China and a sluggish global economy.
Noting the Fed has lowered its federal funds rate an average 5 percentage points in prior downturns, Powell said, “We don’t have that kind of room.” He added, “Fed policy will also be important, though,” if the nation enters a recession. Fed officials have said they still have ammunition to fight a slump, including lowering rates and resuming bond purchases.
Meanwhile, the federal budget deficit hit $984 billion in fiscal 2019, the highest in seven years, and it’s expected to top $1 trillion in fiscal 2020. The federal tax cuts and spending increases spearheaded by Trump have added to the red ink and are set to add at least $2 trillion to the federal debt over a decade. The national debt recently surpassed $23 trillion.
“The debt is growing faster than the economy and that is unsustainable,” Powell said.
He added that a high and rising federal debt also can “restrain private investment and, thereby, reduce productivity and overall economic growth.” That’s because swollen debt can push interest rates higher.
“Putting the federal budget on a sustainable path would aid in the long-term vigor of the U.S. economy and help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy if it weakens,” Powell said.
Many economists are forecasting a recession next year, though the risks have eased now that the U.S. and China appear close to a partial settlement of their trade fight and the odds of a Brexit that doesn’t include a trade agreement between Britain and Europe have fallen.
Powell also said the Fed is unlikely to reduce interest rates further unless the economy weakens significantly – a message he delivered after the central bank trimmed its key rate for a third time late last month.
Since last month’s Fed meeting, the government has reported that employers added 128,000 jobs in October – a surprisingly strong showing in light of a General Motors strike and the layoffs of temporary 2020 census workers.
“There’s a lot to like about today’s labor market,” Powell said. He noted the 3.6% unemployment rate, near a 50-year low, is drawing Americans on the sidelines back into the workforce. And while average yearly wage growth has picked up to 3%, it’s lower than anticipated in light of the low jobless rate. Inflation, he said, remains below the Fed’s 2% target.
“Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly,” Powell said.
Sen. Ted Cruz, R-Texas, tried to coax the Fed chief into weighing in on the potential economic impact of “a massive tax increase,” which some analysts say could be required by several Democratic presidential candidates’ proposals for universal health care or free college tuition.
“I’m particularly reluctant to be pulled into the 2020 election,” said Powell, a Republican and Trump appointee who has been repeatedly attacked by the president for not cutting interest rates more sharply.