Is the Fed Propping Up the US Government?
There are several variations of the quote:
Never believe anything until it has been officially denied.
The newest member of the Federal Reserve’s Board of Governors, Christopher J. Waller gave a speech last week about the importance of Central Bank independence, where he effectively denied the Fed’s culpability in propping up the US Government. He starts with explaining that:
Because of the large fiscal deficits and rising federal debt, a narrative has emerged that the Federal Reserve will succumb to pressures (1) to keep interest rates low to help service the debt and (2) to maintain asset purchases to help finance the federal government.
Such honesty should be commended. This emerging narrative comes as little surprise to those who’ve been following the actions of the Fed. Mr. Waller aims to dispel it as he declares:
My goal today is to definitively put that narrative to rest. It is simply wrong. Monetary policy has not and will not be conducted for these purposes.
He says the Fed acts “solely to fulfill our congressionally mandated goals of maximum employment and price stability,” and to determine appropriate monetary policy towards these mandated goals. In case it still wasn’t clear just how determined he is to dispel the idea that the Fed is nothing more than the nation’s life-support, or moves with motives beyond its dual mandate, he reiterates:
Deficit financing and debt servicing issues play no role in our policy decisions and never will… My objective today is to reinforce that message.
One way to determine validity is to compare the Fed’s actions versus its words. In the same speech, he provides various policy actions from the Fed made in concert with Congress:
The Congress has provided spending of roughly $5.8 trillion during the past year to deal with the pandemic and its effects on the economy.
Of course, a significant portion of this $5.8 trillion did not come from taxpayer dollars, but debt financing. If the Fed didn’t buy a large portion of this debt, the interest rate would be much higher. All the while, the Fed continues buying approximately $120 billion of US debt per month.
As explained, US debt to nominal gross domestic product is over 100 percent, the first time since World War II. Accordingly, per Fed policies:
The Federal Reserve's holdings of U.S. government debt has risen to around $7 trillion, with about $2.5 trillion of that total resulting from its asset purchase program aimed at smoothing credit market functioning and providing monetary accommodation.
If there is a narrative that the Fed is financing the US Government to keep rates low to service debt, or maintain asset purchases, it is hardly baseless, and one that has been reinforced through countless policy decisions and speeches.
It’s difficult to defend the apparent virtues of a Fed independent from Congress. Given last year’s various emergency lending facilities, the skyrocketing government debt (largely taken up by the Fed) and increases to the Fed’s balance sheet with spending programs run by treasury, the line between the Fed and US Government has never been more blurred. Should concern exist that a lack of independence would lead to a central bank which uses the money printer to pursue an anti-capitalist agenda, such as giving stimulus checks to people funded by government debt below market interest rates, it’s safe to say this line was crossed long ago; a line crossed when “independence” still remained intact.