How Rising U.S. Debt Could Challenge Federal Reserve Independence: Janet Yellen's Warning

The ballooning national debt poses a fundamental threat to the central bank’s independence and policy flexibility, according to recent remarks from former Federal Reserve Chair Janet Yellen. Speaking at an economic conference organized by the American Economic Association, Yellen outlined the risks of what economists term “fiscal dominance”—a situation where debt levels force monetary authorities to prioritize government borrowing costs over broader economic health.

The Fiscal Dominance Trap

Under fiscal dominance, the Federal Reserve faces mounting pressure to keep interest rates artificially low to prevent surging government debt service costs from becoming unsustainable. This dynamic fundamentally alters the central bank’s decision-making framework, shifting focus from inflation control and employment targets to accommodating fiscal needs. Yellen warned that political considerations increasingly threaten to overshadow sound economic principles in policy formulation.

Current Trajectory Toward Policy Constraints

The United States is steadily approaching conditions that could trigger this problematic scenario. As debt continues to expand faster than economic output, the constraints on monetary policymakers intensify. Yellen emphasized that the Federal Reserve’s room for maneuver—its ability to respond to genuine economic conditions rather than fiscal requirements—faces progressive erosion.

The implication is stark: without addressing the debt trajectory, the central bank may find its hands increasingly tied, unable to implement policies driven purely by economic necessity. This loss of autonomy represents one of the most significant institutional risks to macroeconomic stability, according to Yellen’s analysis.