Janet Yellen Warns National Debt Risks Fiscal Dominance

Former Federal Reserve Chair Janet Yellen warned at an American Economic Association panel that the United States is approaching a state of fiscal dominance. This condition occurs when a central bank is pressured to maintain interest rates lower than macroeconomic conditions warrant to reduce government debt-servicing costs, thereby undermining the ability to maintain price stability and a healthy labor market.

U.S. national debt reached a record $38.5 trillion by early 2026, pushing the debt-to-GDP ratio above 120%. Annual interest payments now exceed $1 trillion, surpassing defense spending. The Congressional Budget Office projects national debt could reach $50 trillion within a decade. President Donald Trump has repeatedly called for the Federal Reserve to rapidly lower rates to 1% or below to manage these costs.

Economists Eric Leeper and Heather Long noted that the Hamilton Norm—the expectation that debt would be repaid through future surpluses—ended during the pandemic era. Long reported that the bond market is exhibiting distress as investors demand higher term premiums. This fiscal instability has driven demand for defensive assets like gold and bitcoin as investors hedge against currency debasement and dollar depreciation.