WASHINGTON, Sept 21 (Reuters) - Suggestions that the Federal Reserve could lower borrowing costs to help the US government finance its current debt and deficits are the very reason the central bank needs to be independent in setting monetary policy, Chicago Fed President Austan Goolsbee said on Monday.
Fiscal policy and deficit levels need to be treated as "the background weather" by the Fed, relevant to the degree that they influence inflation, but otherwise are a matter for elected officials to decide, Goolsbee told reporters at an event in London.
"Should the Fed try to reduce the rates to make the deficit smaller or to make it less costly to increase the debt?" Goolsbee asked. "Let's be a little careful with that. ... Because I think that is the canonical argument" for central bank independence.
"That is the 'monetize the debt' argument. You say let's try to force rates lower because the debt is getting bigger," Goolsbee said, describing a situation most economists think would lead to higher inflation and likely backfire, as market borrowing rates got bid higher to adjust for rising inflation expectations.
President Donald Trump has suggested the Fed should cut its policy rate to around 1%, dramatically lower than the current 3.75%-4.00% range, to reflect what he argues is US standing as 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.
Reporting by Howard Schneider; Editing by Paul Simao
