Yellen flags rising fiscal dominance risk for US economy

Janet Yellen, a highly influential American economist and policymaker who challenged limitations by becoming the first woman to serve as the Fed chair, released a statement on Sunday, January 4, noting that the preconditions for fiscal dominance are becoming increasingly stronger. Yellen made these remarks during a panel at the American Economic Association’s annual meeting in Philadelphia.

A series of historic firsts mark Yellen’s career: she was the first woman to chair the Council of Economic Advisers (Clinton), the Federal Reserve (Obama), and the Treasury Department (Biden), and the first person ever to lead all three of the United States’ most influential economic institutions.

Following the release of her statement, several economic experts weighed in on the situation. They acknowledged the heightened federal debt as a key long-term challenge for the US economy. This comes as America’s national debt crossed $38.5 trillion in the opening month of 2026, pushing past a level the Committee for a Responsible Federal Budget once expected around 2030.

To break down some of the risks associated with this situation, the experts noted that one risk involves an incident where the size of a debt triggers the central bank to maintain low interest rates to reduce the costs of servicing that debt, rather than implementing measures to control inflation. Such an economic scenario is known as fiscal dominance. 

Yellen calls for the urgency to address the fiscal dominance risk

Reports from the Congressional Budget Office forecast that the federal deficit for this year will attain a peak of $1.9 trillion. This surge is expected to increase the total debt to nearly 100% of the country’s gross domestic product (GDP). Over the next ten years, the federal agency anticipated that this recent figure would soar to about 118% of GDP.

Regarding Yellen’s argument on fiscal dominance risk, sources pointed out that the American economist claimed the US President, Donald Trump, called on the Federal Reserve to reduce interest rates, particularly to ease government debt costs.

Interestingly, Yellen earlier cautioned that if the US president were to achieve his goal of exerting pressure on the Fed to maintain rates at lower levels to reduce the government’s debt burden, the country could be at great risk of becoming a “banana republic.” 

As the discussion hit headlines and ignited controversy among individuals, Loretta Mester, a prominent economist and former President of the Federal Reserve Bank of Cleveland, commented on the matter. According to Mester, the disturbing factor of the current debt challenge is that several from the Trump administration appear not to understand the intense nature of the situation.

At this point, the prominent economist acknowledged that the past administration was aware that a crisis was approaching, even if the officials ultimately underestimated the importance of implementing measures to reduce deficits. “I believe this administration may not understand the consequences,” she added.

Mester admits that fiscal dominance exists, sparking tension among individuals 

Yellen’s soaring optimism in the ecosystem after declaring that a crisis, likely associated with Social Security and Medicare facing bankruptcy, could prompt Congress to gather purposefully for a bipartisan deal concerning budget reforms. 

In a statement, Mester alleged that she is certain Americans will not end up dealing with fiscal dominance. However, even with this assertion, the economist still noted that she believes these risks do exist, and therefore called for the urgency to monitor the industry closely, evaluating its impact on the ecosystem.

On the other hand, David Romer, an economist at UC Berkeley, mentioned that he is doubtful that a bipartisan deal can avert a fiscal disaster. “We have a fiscal issue,” Romer said. “If we don’t address it, it will lead to problems for everyone, including the Fed.” 

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