(A) Monetary Policy

By Judy Shelton – 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