Yellen warns again: Surge in US debt may constrain Federal Reserve's independence

The Federal Reserve System’s Autonomy Faces Threats

Janet Yellen recently delivered an important speech at a seminar hosted by the American Economic Association, delving into the potential impacts of the soaring US national debt on monetary policy formulation. She pointed out that as the debt levels continue to rise, the independence of the Federal Reserve System is facing unprecedented challenges.

In this forum titled “The Future of the Fed,” Yellen elaborated on the chain reactions that current fiscal difficulties could trigger. She expressed concerns about the increasing influence of political considerations in monetary decisions, believing that this trend is eroding the dominance of sound economic judgment in policymaking.

The Dangerous Signal of “Fiscal Dominance”

Yellen particularly emphasized a key concept—the gradual formation of a “fiscal dominance” state. Under this economic pattern, the policy options of the central bank will be significantly constrained. Specifically, the Federal Reserve may be forced to maintain artificially low interest rates, with its primary goal no longer being to respond to actual economic needs but to alleviate the government’s increasingly heavy debt burden.

The former Treasury Secretary warned that the United States is gradually approaching this dangerous state of losing autonomy. As the size of the national debt continues to expand, policymakers’ choices are shrinking, and the contradictions between political pressure and economic realities are intensifying.

The Deep Impact of the Debt Dilemma

Yellen’s warning reflects the core dilemma facing the United States today: how to maintain the independence of the Federal Reserve System while addressing the increasingly complex debt issues. She emphasized that the current trajectory is paving the way for fiscal pressures to erode the Fed’s decision-making authority. This means that future monetary policy may swing back and forth between political interference and economic logic.

Janet Yellen’s insights serve as a wake-up call to the market, reminding all sectors to pay attention to the long-term threats that debt growth poses to the independence of economic decision-making mechanisms.