Growing deficit could drive up US borrowing costs

WASHINGTON: The United States’ mounting sovereign debt could drive up borrowing costs and complicate matters for the Federal Reserve, which faces a challenging environment in 2018, a senior policymaker said.

William Dudley, the influential president of the Federal Reserve Bank of New York, said rising rates on US Treasury bills could make the Fed’s job “a little more difficult.”

“If the budget deficit is on an unsustainable course, which it seems to be right now, bond investors are going to start demanding higher interest rates to compensate them for the risk of taking on the debt,” Dudley told Bloomberg TV.

With US stocks plunging on Wall Street this week, the yield on benchmark 10-year US Treasury notes climbed toward 2.88 percent on Thursday, its highest level since January 2014.

Republican lawmakers in December enacted a sweeping overhaul of the US tax code which forecasts say will add more than US$1 trillion to the federal budget deficit over a decade.

But Dudley, who is due to step down later this year, said fiscal worries were not so far causing the recent rise in interest rates.

“I think it’s really more the strength of the US economy, the strength of the global economy, the easiness of financial conditions,” he said, adding that investors also believed the US economy could grow at an abovetrend pace in 2018.