A Fed that lacks independence may lead the US to fiscal chaos

It would attract bond market vigilantes and drive up interest rates

- BILL DUDLEY

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The US fiscal outlook continues to worsen. The nonpartisan Congressional Budget Office (CBO) projects the country will run annual budget deficits of about 6% of GDP per year over the next 10 years. This would push the total federal debt burden (relative to the size of the economy) to new highs, far exceeding the peak before World War II.

Several factors are at play. First, the US population is ageing. The number of retirees will grow quickly as the baby boomer generation retires, increasing the cost of Medicare and Social Security spending. At the same time, America’s crackdown on immigration and falling fertility rates will cause the number of workers to stagnant.

Second, last year's One Big Beautiful Bill Act (OBBBA) reduced corporate and personal income tax revenue considerably more than it cut spending. The CBO projects the OBBBA will boost the US deficit by $4.7 trillion over 10 years. The CBO estimated this will be partially offset by $3 trillion in revenue generated by higher tariffs, but the forecast may be too optimistic after the US Supreme Court ruled that tariffs enacted under the International Emergency Economic Powers Act (IEEPA) were illegal; the revenue raised under that authority needs to be refunded.