Welcome to the era of good-cop, bad-cop tactics from major government institutions. Fiscal and monetary policy are now working at odds to fight inflation. The Fed could crush demand by raising interest rates to stratospheric levels only to have a spendthrift White House and complicit Congress pump up consumer prices through fiscal measures that expand spending power—cash payments, subsidies, rebates, student loan forgiveness. Read More
Taxes haven’t gone up yet, but inflation and lost productivity amount to financial repression. It’s a $4.5 trillion week in Washington. Between the infrastructure and reconciliation bills in various stages of debate, it’s worth discussing in some depth how all this will be paid for. Government spending is conventionally understood as a matter of increased… Read More
The Federal Reserve’s policies of increasing interest rates and quantitative tightening—reducing its $8.9 trillion balance sheet—will increase the volume and cost of federal government borrowing, slamming the federal budget and exposing the consequences of decades of deficit spending.
Total federal gross interest cost over the 12 months ending on May 31 was $666 billion. If we include the impending extra interest on Treasury bills and the maturing notes, that figure rises to $863 billion. This is a staggering cost. National military spending was $746 billion over the past 12 months; Medicare spending was $700 billion.
The central bank can’t deliver price stability if it’s distracted by climate change and social justice. During Federal Reserve Chairman Jerome Powell’s reconfirmation hearing last week, there was an understandable focus on inflation. Led by Republican Sen. Pat Toomey, several senators expressed concerns that politicization of the Fed is hampering its effectiveness in dealing with inflation and… Read More
No fancy stuff. Raise rates via open-market operations that reduce the size of the balance sheet. The good news is that the Federal Reserve now recognizes that persistent high inflation threatens to overshadow the prospects for real economic growth. The bad news is that the Fed plans to continue buying Treasury debt and mortgage-backed securities… Read More
John Cochrane interview When debt grows so much that people don’t believe the Treasury will pay it, they sell their bonds and buy other things, sending prices through the roof. Annual inflation in the U.S. rose to 7.5% in January, the highest it’s been since February 1982, when it was 7.6% and declining. This current… Read More
Clinging to an emergency policy after the emergency has passed, Chairman Powell courts asset bubbles. With Covid uncertainty receding fast, and several quarters deep into the strongest recovery from any postwar recession, the Federal Reserve’s guidance continues to be the most accommodative on record, by a mile. Keeping emergency settings after the emergency has passed… Read More
The Fed should change its policy regime. It should stop buying mortgage securities immediately. Soon after, it should slow its purchases of Treasury debt. It should not tolerate Fed-financed fiscal expansion. It should unlock the handcuffs imposed by its novel doctrine and render an informed and humble judgment on the state of the economy and the attendant risks to the outlook. Read More
Then as now, what drove higher prices was excess demand owing to runaway government spending. Ronald Reagan and Paul Volcker understood.
History withholds its wisdom from those who ignore its lessons. Forty years ago this month, the fiscal policy of President Ronald Reagan and the monetary policy of Federal Reserve Chairman Paul Volcker broke the back of the 20th century’s most destructive inflation, ushered in an economic expansion that effectively lasted a quarter of a century, and banished inflation—until now. Read More
Our nation’s central bank has become too prominent, too political and too powerful.
The Fed’s ability to purchase massive quantities of U.S. Treasury securities is the dominant factor influencing interest rates across the board and thus the valuation of financial assets. The entire term structure of bond yields reflecting the relationship between short-term and long-term rates is keyed to the 10-year Treasury note rate. What would that benchmark yield reveal if Fed purchases weren’t distorting the market?
The Fed’s prominence not only undermines supply-and-demand interactions for accurately pricing the cost of investment capital; it also compromises the relationship between fiscal and monetary policy. The Fed’s accommodation of deficit spending by lawmakers poses a conflict of interest with political implications. Besides ensuring that the government’s interest expense for servicing debt is reduced, the Fed remits back to Treasury the earnings on its own holdings. Read More