By Vicki Schmelzer

NEW YORK (MNI) – The United States faces “substantial fiscal
challenges” in the coming years,” said New York Fed President William
Dudley Friday in at the U.S. Monetary Policy Forum in New York.

His prepared comments came as part of a panel discussion on the
fiscal challenges facing the world, at the Forum, sponsored by the
Chicago Booth School of Business.

As part of addressing fiscal issues going forward, Dudley
highlighted the importance of “taking the increase in debt service costs
into account that will take place when economic conditions permit the
normalization of monetary policy.”

Currently, there is an unusual situation, where net interest
expense is temporarily depressed, aided by low U.S. interest rates and
the Fed’s enlarged balance sheet.

“This will not last and fiscal authorities need to factor this in
when considering what needed to be done to put the federal budget
deficit and the nation’s debt burden on a sustainable path,” Dudley
said.

Also, he argued, fiscal consolidation needs to also factor in “the
offsetting adjustments needed to keep the economy on an even keel.”

“Fiscal adjustments require offsetting changes in private-sector
spending and saving behavior, and in the trade sector,” he said.

“Prudent economic policies and international coordination can help
ensure that such adjustments take place in ways that support economic
activity (and, by extension also support government revenue,” Dudley
said.

The low interest rate environment provided by the Federal Reserve
is meant to “promote the dual mandate objectives of maximum employment
and price stability in the wake of the financial crisis,” he said.

Both U.S. government and private sector borrowers have benefited
from lower borrowing costs, he said.

These lower costs “will not be sustained over time,” Dudley said

Fiscal policy adjustments have “important implications for the
level and composition of economic activity more boradly – both here and
abroad,” he said.

“If we must undertake fiscal consolidation — and over time we
must, then we need to be cognizant that this adjustment will need to be
accompanied by other offsetting changes in the compostion of economic
activity in our and the global economy,” Dudley said.

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