The US Federal Reserve’s open market committee voted yesterday to maintain its federal funds rate target range at 2.25-2.5%, and to continue to withdraw $US50 billion/month of Treasury & mortgage-backed securities from the market.
In a release from Fed chair Jerome Powell, the committee said the labour market continued to strengthen and economic activity had been rising at a solid rate: “Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation & inflation for items other than food & energy remain near 2%. Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed…
“The committee continues to view sustained expansion of economic activity, strong labour market conditions & inflation near the committee’s symmetric 2% objective as the most likely outcomes. In light of global economic & financial developments and muted inflation pressures, the committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”
Debt:gdp ratio carries on soaring
While the Fed sat on its hands on interest but continued tightening on credit, the US Congressional Budget Office said on Monday it projected that federal debt would grow to equal 93% of gdp (gross domestic product) by 2029.
The office said that, as the effects of fiscal stimulus wane, projected economic growth would fall back below the historical average.
You can see the extraordinary jump in debt arising from quantitative easing that began in President George Bush Jr’s last year and continued through the Obama years.
President Donald Trump could reasonably feel aggrieved that firm measures weren’t taken sooner to limit the GFC-inspired deficit. However, he’s exacerbated the problem. His tax cut had a brief positive impact and he’s carried on lifting the debt level.
AsI write this, the US Debt Clock shows US national debt just $US31 billion short of $US22 trillion. That will take just under 13 days to click over, at $US1 million every 36 seconds.
Monday’s report is the latest in the office’s series of regular reports on Government finances. It projects a federal budget deficit of about $US900 billion this year and annual deficits of $US1 trillion-plus starting in 2022.
“Over the coming decade, deficits (after adjustments to exclude shifts in the timing of certain payments) fluctuate between 4.1-4.7% of gdp, well above the average over the past 50 years. The office’s projection of the deficit for 2019 is now $US75 billion less – and its projection of the cumulative deficit over the 2019–28 period $US1.2 trillion less – than it was in spring (the first quarter of) 2018. That reduction in projected deficits results primarily from legislative changes – most notably, a decrease in emergency spending.”
The Congressional Budget Office said the race to increase debt would take the deficit from 93% of gdp in 2029 to 150% in 2049, and added: “Moreover, if lawmakers amended current laws to maintain certain policies now in place, even larger increases in debt would ensue.”
Since President Lyndon Johnson achieved a surplus in 1969, the only other president to record surpluses was Bill Clinton (his second term, 1998-2001). The Balance website gives details of each president’s performance, and background factors to the whole deficit picture.
What does it matter to us?
It matters to the whole world in a variety of ways.
The first impact point is that the $US remains by far the largest currency for international trade. China & Russia have conducted some transactions between them in local currency, and China is likely to shift further from US influence if it can.
But, as the US gathers Western support against Chinese technological transgressions (the reports last year by the US Trade Representative and White House Office of Trade & Manufacturing were the basis; they were highly slanted reports, relying on assertion & allegation without presenting fact; but this month’s allegations of criminal activity sound like they rely on fact), international trade stands to become further distorted by ideological & hegemonic stances underlying the tariff wars.
As those issues move to the foreground, the health of the currencies we trade in will become more important, and the health of the $US at the moment is precarious.
Attribution: Federal Reserve, Congressional Budget Office, The Balance, US Debt Clock.