NEW YORK - The United States faces "substantial fiscal challenges" in the coming years," said New York Fed President William Dudley Friday in at the U.S. Monetary Policy Forum in New York.

His prepared comments came as part of a panel discussion on the fiscal challenges facing the world, at the Forum, sponsored by the Chicago Booth School of Business.

As part of addressing fiscal issues going forward, Dudley highlighted the importance of "taking the increase in debt service costs into account that will take place when economic conditions permit the normalization of monetary policy."

Currently, there is an unusual situation, where net interest expense is temporarily depressed, aided by low U.S. interest rates and the Fed's enlarged balance sheet.

"This will not last and fiscal authorities need to factor this in when considering what needed to be done to put the federal budget deficit and the nation's debt burden on a sustainable path," Dudley said.

Also, he argued, fiscal consolidation needs to also factor in "the offsetting adjustments needed to keep the economy on an even keel."

"Fiscal adjustments require offsetting changes in private-sector spending and saving behavior, and in the trade sector," he said.

"Prudent economic policies and international coordination can help ensure that such adjustments take place in ways that support economic activity (and, by extension also support government revenue," Dudley said.

The low interest rate environment provided by the Federal Reserve is meant to "promote the dual mandate objectives of maximum employment and price stability in the wake of the financial crisis," he said.

Both U.S. government and private sector borrowers have benefited from lower borrowing costs, he said.

These lower costs "will not be sustained over time," Dudley said

Fiscal policy adjustments have "important implications for the level and composition of economic activity more broadly - both here and abroad," he said.

"If we must undertake fiscal consolidation -- and over time we must, then we need to be cognizant that this adjustment will need to be accompanied by other offsetting changes in the composition of economic activity in our and the global economy," Dudley said.

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