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Fed's Kaplan, warning on debt, urges care on fiscal policies
January 18, 2017 / 2:48 PM / in 9 months

Fed's Kaplan, warning on debt, urges care on fiscal policies

DALLAS (Reuters) - Dallas Federal Reserve Bank President Robert Kaplan on Wednesday called U.S. structural reforms like corporate tax and regulatory review a “healthy thing,” but urged care that new policies do not add to already unsustainably high public debt.

“Through most of our lifetimes ...this country and most advanced economies have been able to stimulate GDP growth with either tax cuts or government spending or other fiscal policy,” Kaplan said at a University of Texas at Austin event held at the Dallas Fed.

But now, with public debt at about 76 percent of U.S. GDP and set to rise, even as the workforce shrinks, “we’ve got to use our money very wisely because it is my view that probably already the debt level in this country is unsustainable,” Kaplan said. “When we think about new policies, we have to keep it in mind.”

Donald Trump, who will be sworn in as the next U.S. president on Friday, has promised tax cuts, regulatory rollbacks and infrastructure spending that he says will boost economic growth.

Increasingly, Fed policymakers have warned that adding too much fiscal stimulus at this point could backfire on the economy, forcing the Fed to raise rates aggressively and potentially tipping the economy into recession.

Kaplan said he forecasts economic growth of about 2.3 percent this year, even without any new fiscal policies, and sees tight labor markets and a gradual increase in inflation toward the Fed’s 2-percent inflation target.

In response, said Kaplan, who has a vote this year on interest-rate policy, “We should be removing accommodation, probably some time later this year early next year looking at the Fed balance sheet in order to examine how we might let that run off or reduce it.”

As interest rates rise, he noted, the government’s debt burden will become even more expensive to bear.

“We are going to have to be very thoughtful about policies that either grow the workforce, improve productivity, but are very judicious about taking into account our debt situation,” he said.

Reporting by Lisa Maria Garza; writing by Ann Saphir; Editing by Chizu Nomiyama

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