Yellen warns that the risk of "financial dominance" in the United States is increasing, and high debt levels may constrain the Federal Reserve's ability to combat inflation.

A group composed of several well-known economists expressed that the escalating federal debt poses a long-term risk and is the primary issue facing the US economy. These risks include a scenario in which the debt level may compel the Federal Reserve to maintain low interest rates to minimize debt servicing costs, rather than to curb inflation - a concept known as "fiscal dominance." Former Treasury Secretary and Fed Chair Janet Yellen stated in a panel discussion at the American Economic Association's annual meeting held in Philadelphia last Sunday, "The prerequisites for fiscal dominance are clearly increasing." The Congressional Budget Office predicts that this year's federal deficit will reach $1.9 trillion, pushing the total debt to approximately 100% of GDP. This ratio is expected to rise to around 118% of GDP over the next decade. Yellen also pointed out that President Donald Trump has "publicly called for" the Fed to explicitly lower interest rates to reduce the government's debt servicing costs. Yellen had previously warned that if Trump successfully pressured the Fed to maintain low rates in order to alleviate government debt burdens, the U.S. could risk becoming a "banana republic." Former Cleveland Fed President Loretta Mester, who also spoke at the same panel, added that the "most frightening" aspect of the current debt issue is that Trump administration officials do not seem to understand the threats involved. "Even if responsible action is not ultimately taken to control the deficit, previous administrations understood they were standing on the edge of a cliff," she said. "I'm not sure this administration understands the consequences." Despite this, Yellen expressed hope that a crisis - perhaps one concerning the insolvency of Social Security and Medicare - could spur Congress to reach a bipartisan agreement on budget reform. "I doubt we'll end up with fiscal dominance in the U.S., but I do think the danger is real and should be watched," she said. Economist David Romer from the University of California, Berkeley, stated that he is "less optimistic" about the possibility of a bipartisan agreement avoiding a "fiscal calamity." "We have a fiscal problem," Romer said. "If we don't solve it, it's going to cause problems for everyone, including the Fed."