Former New York Federal Reserve President William Dudley has issued a warning that the U.S. fiscal outlook is deteriorating. Projections from the Congressional Budget Office (CBO) indicate the annual fiscal deficit will average about 6% of GDP over the next decade, with the federal debt-to-GDP ratio climbing to a record high. Dudley emphasized that against this backdrop of worsening finances, any erosion of the Federal Reserve's independence that forces it to keep interest rates artificially low could lead to heightened inflation and interest rate risks for the United States, potentially even triggering a fiscal crisis.

Structural factors are significantly worsening the U.S. fiscal position. Firstly, mounting pressures from an aging population are a major concern. As the baby boomer generation retires, spending on Social Security and Medicare is set to rise substantially. Concurrently, tighter immigration policies and declining birth rates suggest labor force growth will stagnate, thereby weakening the tax base.

Secondly, fiscal policy itself is exacerbating the deficit. The "One Big Beautiful Bill Act" passed last year, which significantly cut corporate and individual income taxes, is a key factor. The CBO estimates this legislation will increase the U.S. fiscal deficit by approximately $4.7 trillion over the coming decade.

While the CBO had previously estimated that increased tariffs could generate around $3 trillion in revenue over ten years, this forecast is highly uncertain. The U.S. Supreme Court has already ruled that tariffs levied under the International Emergency Economic Powers Act (IEEPA) are unlawful and required the refund of associated duties, indicating previous revenue projections may have been overly optimistic. The Trump administration's attempts to use new tariff policies to offset lost tax revenue face limited legal authority; for example, comprehensive tariffs implemented under Section 122 of the Trade Expansion Act can only last for 150 days unless extended by Congress.

Dudley also suggested that CBO projections for future defense spending are likely too low. Even before the outbreak of war with Iran, the Trump administration had proposed increasing the defense budget for fiscal year 2027 to $1.5 trillion, up from $893 billion in FY2025. However, the CBO's baseline projection assumes only a 1% increase in spending from 2025 to 2027. Furthermore, military conflicts can incur massive additional costs; estimates from the Center for Strategic and International Studies suggest a war with Iran could cost the U.S. approximately $1 billion per day.

As deficits widen, the U.S. government's debt servicing costs are rising rapidly. The CBO projects that federal interest payments as a share of GDP will increase from 3.3% in 2026 to 4.6% by 2036. Compounding this, a substantial volume of low-interest debt issued between 2009 and 2022 is maturing and will need to be refinanced at higher rates, further increasing the fiscal burden. Dudley views this as a key reason behind the Trump administration's attempts to influence Fed policy to keep rates low.

Even stronger growth and higher inflation may not fully resolve the issue. The CBO expects U.S. nominal GDP to grow at about 4% annually over the next decade, while the fiscal deficit is projected to be around 6% of GDP. This implies the federal debt-to-GDP ratio could still increase by roughly 2 percentage points each year. Even if economic growth and inflation were each 1 percentage point higher, bringing nominal GDP growth to 6%, fiscal pressures would persist. Accelerated growth is often difficult to sustain long-term, and if inflation rises while Fed independence is compromised, inflation expectations could become unanchored, pushing up long-term Treasury yields and thereby increasing government borrowing costs.

Dudley concluded with a warning that markets currently appear to be ignoring the unsustainable U.S. fiscal path and the lack of political will to address it. He invoked economist Herb Stein's famous adage: "If something cannot go on forever, it will stop." Should the Fed's independence be undermined, it could trigger a resurgence of bond market "vigilantes," leading to financial market turmoil and ultimately forcing the administration and Congress to adjust fiscal policy.