Federal Reserve Board Governor Mr Edward Gramlich warned today that large, persistent US budget and trade deficits could lead to "significant economic adjustments" worldwide, and urged fiscal belt-tightening.
"From a policy standpoint, neither deficit may be terribly harmful in the short run," Mr Gramlich said, referring to record shortfalls in both the budget and the current account, the broadest measure of US trade with the rest of the world.
"In the long run, however, both deficits could become much more worrisome," he said in the text of a speech made at the Euromoney Bond Investors Congress in London.
"At some point, continued large-scale trade deficits could trigger equilibrating, and possibly dislocating, changes in prices, interest rates, and exchange rates," the US central banker said. "Continued budget deficits...may also trigger dislocating changes."
The White House has said it expects the US budget deficit to hit a record $521 billion this year, or 4.5 per cent of US gross domestic product - a shortfall that would further push up the government's debt-to-GDP ratio.