Federal Reserve Chairman Jerome Powell said that now, when the economy is strong, is the best time to reduce deficits, which are high by historical standards.
“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn. A more sustainable federal budget could also support the economy’s growth over the long term,” Powell said in remarks prepared for a House of Representatives hearing on Tuesday.
The Congressional Budget Office projected last month that annual deficits would meet or exceed $1 trillion for at least the next 10 years. Such outsize deficits have only previous occurred during weak economies or when the country was at war.
“If current laws governing taxes and spending generally remained unchanged, federal deficits would continue to be large by historical standards from 2020 through 2030 and beyond,” the CBO stated in its January report on the fiscal state of the federal government.
Powell also warned that if economic conditions deteriorate, the Fed may not be able to lower interest rates enough to stimulate growth because rates are already low.
“There has been a decline over the past quarter century in the level of interest rates consistent with stable prices and the economy operating at its full potential,” he said. “This low interest rate environment may limit the ability of central banks to reduce policy interest rates enough to support the economy during a downturn.”
A strong economy prompted the Fed to hold interest rates steady in its last meeting. Meanwhile, the economy grew at an annual rate of 2.1% in the fourth quarter. Forecasters expected a 2% growth rate. There were also 225,000 jobs added to payrolls in January, which beat expectations.
