Wall Street Worries Over Swelling US Debt Put Fed in Tight Spot

The Federal Reserve faces potential policy pitfalls ahead as it wrestles with how to respond to investor angst about the US government’s $33.5 trillion mountain of debt.

Concerns about America’s fiscal future have already contributed to a run-up in US bond yields that has surprised policymakers and prompted them to consider postponing for now plans for another interest-rate increase.

US Debt Pile Grows

Worries on Wall Street about the US budgetary morass pose risks to both sides of the central bank’s dual mandate.

The disquiet over deficits and debt puts upward pressure on long-term interest rates, threatening to slow growth and push up unemployment. At the same time, it can also act as kindling for higher inflation, especially if the Fed is perceived as downplaying its goal of price stability in order to limit the federal government’s borrowing costs.

“We are witnessing the beginning of a regime change in how investors perceive America’s fiscal sustainability,” said former Fed Governor Kevin Warsh, who was an adviser to President George W. Bush from 2002 to 2006.