WASHINGTON: The United States' mounting sovereign debt could drive up borrowing costs and complicate matters for the Federal Reserve, which faces a challenging environment in 2018, a senior policymaker said on Thursday (Feb 8).
William Dudley, the influential president of the Federal Reserve Bank of New York, said rising rates on US Treasury bills could make the Fed's job "a little more difficult."
"If the budget deficit is on an unsustainable course, which it seems to be right now, bond investors are going to start demanding higher interest rates to compensate them for the risk of taking on the debt," Dudley told Bloomberg TV.
With US stocks plunging on Wall Street this week, the yield on benchmark 10-year US Treasury notes climbed toward 2.88 per cent on Thursday, its highest level since January 2014.
Republican lawmakers in December enacted a sweeping overhaul of the US tax code which forecasts say will add more than US$1 trillion to the federal budget deficit over a decade.
But Dudley, who is due to step down later this year, said fiscal worries were not so far causing the recent rise in interest rates.
"I think it's really more the strength of the US economy, the strength of the global economy, the easiness of financial conditions," he said, adding that investors also believed the US economy could grow at an above-trend pace in 2018.
Dudley also reiterated his position that this week's correction on Wall Street was not currently a threat to the economy.
The Dow Jones Industrial Average lost more than 1,000 points on Thursday, with all three major indices falling about four per cent.
"So far I'd say this is small potatoes," Dudley said. "The little decline that we've had in the equity market today has virtually no implications for the economic outlook."