Practically the first words out of New York Federal Reserve Bank President William Dudley’s mouth in a speech today were these:
[I]t is essential that the United States put in place a credible program of medium-term fiscal consolidation that addresses our sizeable and growing structural deficits in a manner that is consistent with supporting ongoing economic recovery.
Dudley warned that the current low cost of debt service on US borrowing will rise “when economic conditions permit the normalization of monetary policy.” By the Fed’s own reckoning, that’s the end of 2014:
Eventually, as economic and financial conditions improve, the pursuit of the dual mandate will lead to a different monetary policy stance, one that requires higher short-term interest rates. And, the Federal Reserve will also eventually shrink the size of its balance sheet. These actions will tend to increase the Treasury’s net interest costs and pull down the Federal Reserve’s remittances to the Treasury. Together, these two effects will sharply push up the Treasury’s net interest burden.
These are words to the wise, if any such still exist in Congress.
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