Federal Reserve Chairman Jerome Powell called on Congress to reduce the U.S. federal budget deficit to ensure the central bank could adequately respond to a financial crisis or recession.
Powell told a House committee Tuesday that lawmakers should curb federal spending while the economy is running strong before a downturn forces Congress or the Fed to pump stimulative spending into the U.S.
“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn,” Powell said Tuesday before the House Financial Services Committee.
“A more sustainable federal budget could also support the economy’s growth over the long term.”
Powell’s comments come one day after President Trump proposed a budget for fiscal 2021 with a $1 trillion deficit that puts the U.S. on track to balance its spending in 15 years. Those projections assume the economy growing at a far faster rate than predicted by most economists.
Powell, a Republican widely seen as moderate, has frequently called on Congress to reduce the deficit throughout his tenure as Fed chairman. The Fed chief is among several policymakers and economists concerned about how a combination of low interest rates and high debt could hamstring policymakers if the economy slows down.
The Fed has historically responded to economic downturns with drastic interest rates cuts, reducing the cost of borrowing to stimulate the economy. The bank reduced interest rates to 0 percent after the 2007 financial crisis and gradually raised them to a baseline range of 2.25 percent to 2.5 percent by December 2018.
But the Fed reversed course last year to cut rates to the 1.5 percent to 1.75 percent range, well below the historic average of 5 percent. Some economists fear that interest rates are currently too close to 0 percent for a swift rate cut to stave off a recession. That would likely boost pressure on Congress to pass a massive stimulus bill akin to the 2009 measure enacted by former President Obama.
“The current low interest rate environment means that it would be important for fiscal policy to help support the economy if it weakens,” Powell said Tuesday.