Yellen's Warning: "Trump's 'Fiscal Dominance' Risks Inflation and Financial Instability" [American Economic Association 2026]

American Economic Association Annual Meeting (ASSA) 2026
Former Treasury Secretary Yellen Raises Concerns Over Central Bank Independence
"Fed Is Not a Means of Financing Fiscal Authorities"

Janet Yellen, former U.S. Secretary of the Treasury, has warned that the Trump administration's infringement on central bank independence could push the United States into the so-called risk of "fiscal dominance." She pointed out that pressuring monetary authorities to lower interest rates in order to reduce the federal government's debt burden could fuel inflation and financial market instability, ultimately backfiring on the U.S. economy.

Janet Yellen, former U.S. Secretary of the Treasury, spoke at a panel discussion during the American Economic Association Annual Meeting (ASSA) 2026 held on the 4th (local time) in Philadelphia, Pennsylvania, USA. Philadelphia=Photo by Kwon Haeyoung

On the 4th (local time), during the "Future of the Fed" session at the American Economic Association Annual Meeting (ASSA) 2026 held in Philadelphia, Yellen stated, "The Federal Reserve is not, and must never become, a funding tool for fiscal authorities."

Yellen served as Chair of the Federal Reserve from 2014 to 2018 and as Secretary of the Treasury under former President Joe Biden.

She interpreted President Trump's ongoing pressure on the Fed to cut interest rates as a warning sign of a shift toward fiscal dominance. Fiscal dominance refers to a situation in which the government's deficits and debt accumulate to the extent that monetary policy becomes subordinated to fiscal needs, rather than focusing on its original goals of price and employment stability. In such cases, monetary policy is likely to be distorted toward supporting government borrowing costs-such as through interest rate cuts or government bond purchases-regardless of macroeconomic conditions.

Yellen pointed out that this could result in: ▲ higher and more volatile inflation, ▲ a persistent rise in expected inflation, and ▲ renewed increases in risk premiums and borrowing costs.

Currently, the U.S. federal government debt stands at about $38 trillion (approximately 5,500 trillion won). The fiscal deficit ratio to gross domestic product (GDP) is around 6%, a level rarely seen outside of wartime or severe recessions. Yellen emphasized that this figure should be lowered to 3%. However, the Congressional Budget Office (CBO) projects that the federal debt-to-GDP ratio will rise from about 100% this year to over 150% in the next 30 years, and that the net interest cost-to-GDP ratio will increase from about 3.2% to 5.4% over the same period, indicating that fiscal conditions are far from favorable.

However, she drew a clear line, stating that the United States has not yet entered a phase of fiscal dominance. Yellen noted, "Since the pandemic, the Fed has rapidly raised interest rates to combat inflation, even at the cost of worsening fiscal conditions," and added, "Despite unprecedented presidential pressure to cut rates, the Fed has maintained its commitment to price and employment stability."

Nevertheless, she made it clear that deteriorating medium- to long-term fiscal prospects could lead the country down a path toward fiscal dominance. She specifically mentioned President Trump again, saying, "The president has publicly demanded that the Fed lower rates to levels far below the neutral rate in order to reduce the government's interest expenses." She strongly criticized attempts to dismiss Fed Governor Lisa Cook for not complying with such demands, calling them "acts that seriously threaten the Fed's independence."

Yellen warned, "If the market loses confidence in the possibility of meaningful government deficit reduction, a rise in risk premiums could trigger a debt spiral, which could in turn put downward pressure on the dollar." The recent increase in U.S. Treasury yield volatility and the downgrades of the U.S. sovereign credit rating by major credit rating agencies suggest that these concerns are already beginning to be reflected in the market.

As a solution to prevent the risk of fiscal dominance, Yellen proposed a bipartisan fiscal agreement to adjust the medium-term fiscal trajectory. She argued that political determination is needed to simultaneously reduce discretionary government spending, adjust mandatory spending such as Social Security and healthcare programs, and increase revenue.

Furthermore, Yellen assessed that the dollar's dominance remains robust for now, but predicted that as the United States increasingly uses sanctions and the world becomes more reliant on dollar-centered finance, more countries may accelerate their moves to reduce dependence on the dollar.