Tags: Fed | Bullard | US | Deficit | crisis | us | economy

Fed’s Bullard: US Must Fix Deficit Before Crisis Strikes

Wednesday, 18 May 2011 01:33 PM

Federal Reserve Bank of St. Louis President James Bullard said the U.S. needs to address its budget deficit before investors lose confidence in the nation’s ability to repay its debt.

“When it does blow up it will be too late,” Bullard said today in an interview at Bloomberg’s headquarters in New York.

“When markets lose confidence in the U.S. and say that they don’t trust us anymore, rates will skyrocket and the crisis will be upon you, all the debt and deficit figures will look all that much worse, and you won’t be able to do anything about it because these are problems that take a long time to fix.”

Lawmakers and investors shouldn’t take comfort in current U.S. borrowing costs because markets are often “complacent” about the risk from excessive deficit spending, as evidenced by the unfolding of the sovereign debt crisis in Europe, Bullard said.

The yield on the benchmark 10-year Treasury note climbed three basis points, or 0.04 percentage point, to 3.15 percent at 12:50 a.m. in New York, according to Bloomberg Bond Trader Prices. That’s below its average of 4.08 percent during the last decade, Bloomberg data show.

“You cannot take too much comfort from the fact that ‘Oh, nobody is worried about this today,’ because when the crisis is upon you it will really hit,” Bullard said. “It’s like the markets are almost asleep about the whole issue until one day you wake up and it becomes the primary issue.”

Bipartisan Accord

Lawmakers and the Obama administration are trying to reach a bipartisan accord on cutting long-term deficits as part of a plan to raise the legal limit on the national debt. Senate Minority Leader Mitch McConnell, a Republican from Kentucky, said his party wants “significant” cuts in spending and no tax increases as a condition for lifting the limit.

“It really is important to get on this right now,” Bullard said. “If you look at U.S. debt and deficit numbers, we’re worse than some of the worst offenders in Europe.”

Treasury Secretary Timothy Geithner said yesterday the U.S. should get its deficit below 3 percent of gross domestic product, from 10.9 percent of GDP projected for the current fiscal year ending Sept. 30.

Bullard said that while it’s “helpful” that the issue is being debated, it’s a “very dangerous thing” to allow negotiations to “go right up to the deadline.”

On the debt ceiling, the U.S. was $25 million under the $14.294 trillion limit as of May 16, according to Treasury data released yesterday. Geithner said this week he had taken measures to stay below the limit until Aug. 2.

“This is a cloud that’s hanging over the U.S. economy and as long as it’s there I think it does reduce growth and hurts the U.S. situation,” Bullard said.

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Federal Reserve Bank of St. Louis President James Bullard said the U.S. needs to address its budget deficit before investors lose confidence in the nation s ability to repay its debt. When it does blow up it will be too late, Bullard said today in an interview at Bloomberg...
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2011-33-18
Wednesday, 18 May 2011 01:33 PM
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