August 27, 2014

Yellen Decries Fiscal Drag in Recent Testimony

  • The federal budget is an expression of our country's values. Where we choose to spend and at what levels, how and who we tax, and the borrowing we...

In testimony to lawmakers last week, Federal Reserve Chair Janet Yellen criticized current fiscal policy, saying budget cuts have put a drag on the economy while longer-term deficit projections still need to be addressed.

During her testimony to the Senate Banking Committee, which focused mainly on monetary policy, Yellen said fiscal policy “has been quite tight and has imposed a substantial drag on spending in the U.S. economy over the last several years.”

She noted that this had put a greater burden on monetary policy to support the economy. But Yellen added that the fiscal drag this year will be less than in the past. This is partly because the Ryan-Murray budget agreement in December raised the caps on discretionary spending.

On the same day as Yellen’s testimony, the Bureau of Economic Analysis indicated that GDP growth in the last quarter was at an annual rate of 2.4 percent, well below the 3.2 percent that was initially thought. The economy has faced numerous headwinds recently, including the government shutdown last fall and an unusually cold winter.