Chair Powell: [W]e don’t see ourselves as, you know, the judges of appropriate fiscal policy. I will say, and many of my predecessors have said, that we’re on an unsustainable fiscal path and that needs to be addressed over time. But I think trying to get into that with lawmakers would be—would be kind of inappropriate, given our independence and our need to stick to our knitting.

Edward Lawrence: Is there any conversation then about the Federal Reserve financing some of that debt that we’re seeing coming down the pike?

Chair Powell: No. Under no circumstances.

– FOMC Meeting June 2023

The downgrading of U.S. government debt from AAA to AA+ by the rating agency Fitch has once again put U.S. government debt back into the spotlight. It was preceded several days earlier by the Treasury’s announcement that it would be issuing even more debt going forward than the markets had anticipated. Yields on 10-year U.S. Treasury notes increased from 3.96% on the day of the announcement to 4.18% in the following few days. The move has started to spook investors, who are still recovering from last year’s collapse in bond prices—one of the largest drawdowns in the market’s history—as well as yet another seat-of-the-pants debt ceiling standoff. In speaking with clients, government debt dynamics are once again top of mind, and therefore the topic of this Economics Weekly.

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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.