Dudley warns US fiscal position is on an 'unsustainable trajectory'

The US fiscal position is on an “unsustainable trajectory” due to a lack of political will to resolve the crisis at a time when debt costs are soaring, former Federal Reserve Bank of New York President Bill Dudley said.

“The situation is going to get worse because the government’s debt is going to be repriced at much higher interest rates than what we’ve had over the last 15 years” Dudley, who is also a columnist for Bloomberg Opinion and a senior economic adviser to Bloomberg Economics, said via videocall at a conference in Sydney. 

He also pointed to ballooning costs of healthcare and social security as the baby-boomer generation retires, further exacerbating the fiscal outlook.

“A final problem we have is the political problem. We do not have a very functional government in the United States right now in terms of getting things done,” Dudley added. “We’re absolutely on an unsustainable trajectory.”

Sentiment in global markets has been hurt by ongoing concerns over the US government’s finances and its need for new debt. Last week witnessed one of the worst auctions of 30-year bonds in a decade and Friday ended with a warning from Moody’s Investors Service that it’s inclined to downgrade the nation amid wider budget deficits. 

The risk of a government shutdown as soon as this week also looms, although this may now be easing. 

Dudley, a senior research scholar at Princeton University’s Center for Economic Policy Studies, said policymakers are still grappling with the question of whether rates are restrictive enough to pull inflation down, following 5.25 percentage points of hikes.

The US central bank paused at its past two meetings, prompting financial markets to price in cuts from the middle of next year. 

Fed officials have repeatedly stressed that they’re in no rush to lower rates, with the priority squarely on continuing to cool inflation. That will be a key focus on Tuesday when economists expect the Labor Department will report that growth in the consumer-price index slowed to an annual rate of 3.3% in October from 3.7% in September. 

Dudley added that the Fed is unlikely to be as quick to reduce rates as markets anticipate.

“The real thing to focus on is really the labor market,” he said. “The Fed probably needs a little bit more slack in the labor market for getting wage inflation down to a level consistent of 2% inflation.”