Fiscal dominance: Behind the Fed’s growing and unavoidable burden
Main Idea
The article discusses the growing burden of fiscal dominance on the Federal Reserve, highlighting the increasing debt-to-GDP ratio and the pressure on the Fed to accommodate fiscal policies, with historical context and current political tensions.
Key Points
1. The debt-to-GDP ratio has risen significantly, from 35% in the 1980s to 120% now, increasing the Fed's fiscal burden.
2. Historical Fed chairs like Alan Greenspan and Paul Volcker used monetary policy as leverage to demand deficit cuts, but current dynamics have reversed with political pressure on the Fed.
3. President Trump has explicitly called for fiscal dominance, urging lower interest rates to reduce national debt costs, a first for a US president.
4. The Fed faces a dilemma: raising rates could worsen the deficit, while accommodating fiscal policies risks inflation and loss of independence.
5. Non-discretionary federal spending has risen from 45% in the 1980s to 73%, limiting fiscal flexibility and increasing reliance on the Fed.
Description
Fiscal dominance isn’t about interest rates and it isn’t about Trump, either
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