Goolsbee warns against Fed rate cuts to ease US debt burden

Suggestions that the Federal Reserve should lower borrowing costs to help the US government finance its debt and deficits are precisely why the central bank must set monetary policy independently, Chicago Fed President Austan Goolsbee said.

Speaking to reporters at an event in London, Goolsbee said fiscal policy and deficit levels should be treated by the Fed as "background weather" — relevant only to the extent they affect inflation, and otherwise a matter for elected officials.

He questioned whether the Fed should try to reduce rates to make the deficit smaller or to make it less costly to increase the debt, urging caution. Goolsbee described such an approach as the "monetize the debt" argument — forcing rates lower because the debt is growing — a situation most economists believe would lead to higher inflation and likely backfire, as market borrowing rates rise to adjust for higher inflation expectations.

President Donald Trump has suggested the Fed should cut its policy rate to around 1%, well below the current 3.75%-4.00% range, arguing that the US is the world's most trustworthy borrower. Long-term rates on US debt have been rising recently, adding to the cost of financing annual deficits that remain elevated at about 6% of annual economic output.