jerome h powell : discussion of “ crunch time – fiscal crises and the role of monetary policy ” speech by mr jerome h powell, member of the board of governors of the federal reserve system, at the “ us monetary policy forum ” conference, sponsored by the university of chicago booth school of business, new york city, 22 february 2013. * * * the issue of fiscal sustainability and its interaction with monetary policy is certainly timely. 1 many advanced economies are in an extended period of slow growth and high deficits, and face long - term fiscal pressures from aging populations. i agree with much in this broad - ranging paper. 2 in particular, the authors join others in finding that accommodative monetary policy is often associated with successful fiscal consolidations. they conclude that a “ tough love ” alternative, which would call for the federal reserve to withhold monetary accommodation until fiscal policymakers enact legislation to reduce budget imbalances, is likely to be counterproductive. indeed, i would argue that the tough love approach also would require the fed to deviate from the dual mandate that the congress has assigned it, while assuming a role in influencing fiscal policy that the congress has not assigned it. i find myself in disagreement, however, with the paper ’ s assessment that the current fiscal policy challenges might interfere in the near - term with the conduct of monetary policy in the united states. three important propositions underlie the authors ’ argument on this issue : 1. the federal government ’ s fiscal path is unsustainable under current policies. 2. if the market concludes that a government either cannot or will not service its debt, the central bank may be forced to choose ultimately between monetization leading to inflation or standing by as the government defaults – the threat of “ fiscal dominance. ” 3. the federal reserve ’ s balance sheet is currently very large by historical standards and still growing. the process of normalizing the size and composition of the balance sheet poses significant uncertainties and challenges for monetary policymakers. i believe all of these statements to be true. they are also widely, if not universally, accepted. however, based on these points and, importantly, on their empirical findings, the authors set out to show that fiscal difficulties present a near - term threat to the conduct of monetary policy. the paper argues that rising fiscal pressures, exacerbated by federal reserve losses on asset sales and low remittances to the treasury, could lead the federal reserve to delay balance

, as well as unexpected new shocks. in the past two years, spending cuts and tax increases totaling about $ 3. 5 trillion over the next 10 years have been enacted. assuming these measures are not rolled back – in particular, that the spending sequestration either takes effect or is replaced by equivalent deficit - reducing measures – a reasonable “ current policy ” projection is that the ratio of debt to gdp will be roughly stable at around 75 percent through about 2020. 6 after that, under current policy, health - care costs and, to a much lesser extent, pension costs will produce a sharp, sustained increase in the ratio of debt to gdp. fiscal sustainability and monetary policy the authors review empirical evidence of sovereign borrowing costs for 20 advanced economies. they join others in finding a statistically significant relationship between sovereign debt levels and borrowing costs. 7 they also find nonlinear increases in borrowing costs beginning at debt - to - gdp ratios of around 80 percent. but the nonlinearities they find are driven to a great extent by the experience of smaller euro - zone nations that, of course, figure 1 shows federal debt held by the public and primary budget surpluses – that is, the difference between federal revenues and federal noninterest outlays – as a percent of nominal gdp from fiscal year 1912 through fiscal 2012. see quote on p. 290 in henning bohn ( 2011 ), “ the economic consequences of rising u. s. government debt : privileges at risk, ” finanzarchiv / public finance analysis, vol. 67 ( september ), pp. 282 – 302. see carmen m. reinhart and kenneth s. rogoff ( 2009 ), “ the aftermath of financial crises, ” american economic review, vol. 99 ( may ), pp. 466 – 72. see loren adler, shai akabas, and brian collins ( 2013 ), “ key takeaways from the 2013 – 2023 cbo budget and economic outlook, ” bipartisan beat blog, bipartisan policy center, february 7. numbers are modified to assume that the spending sequestration either takes effect or is replaced by equivalent deficit reducing measures. for example, see eric engen and r. glenn hubbard ( 2005 ), “ federal government debt and interest rates, ” in mark gertler and kenneth rogoff, eds., nber macroeconomics annual 2004, vol. 19 ( cambridge, mass. : mit press ), pp. 83 – 138 ; thomas laubach (