After raising rates as expected, Federal Reserve Chair Jerome Powell addressed the nation this week without referencing Ukraine nor the Pandemic as the cause of (price) inflation. Perhaps the start of a new year gave a reason for the change, or maybe he’s looking to start a new narrative soon. It’s difficult to determine as he continued in Fedspeak, avoiding real answers during the Q & A; that is, until he was pressed about the debt ceiling:
OK. So, I feel like I have to say this. There's only one way forward here, and that is for Congress to raise the debt ceilings so that the United States government can pay all of its obligations when due.
Raise the debt ceiling, so new debt can be created to pay off old debt. Astounding!
If any adverse consequences, negative externalities, or other far reaching consequences exist with this plan, Powell is either unaware or unconcerned:
… any deviations from that path would be highly risky and that no one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner.
Reminding the world:
In terms of our relationship with the Treasury, we are their fiscal agent, and I'm just going to leave it at that.
It’s a self-reference not often acknowledged; but he’s not wrong. In a paper published by the Fed in 2000, when their balance sheet was under $700 billion (compared to today’s $8.4 trillion) and when much of what the Fed does currently would be considered unfathomable, they wrote:
The Federal Reserve Act of 1913 provides that the Federal Reserve Banks will act as fiscal agents and depositories of the United States… As fiscal agents, the Reserve Banks support the Department of the Treasury with services related to the federal debt. For example, they receive bids for auctions of Treasury securities to finance the debt and issue the securities in book-entry form.
Few mysteries, yet many peculiarities in the way a central bank works. But one such instance is when this same fiscal agent becomes the bidder of last resort, holding debt on its own books via a roundabout method of purchasing US debt through banking intermediaries to skirt the law. Of America’s current $31.5 trillion debt, this fiscal agent owns $5.4 trillion, or roughly 17%.
Why these fiscal or monetary restraints were initially put in place is worth questioning. One could argue their creators genuinely thought a debt ceiling would control the level of debt, similar to how a central bank controls the national purse. However, we mustn’t be naïve.
Debt ceiling debates are not much different than Powell’s press conferences, providing a little bit of show, the proverbial bread and circus to appease the masses. But ultimately, the debt ceiling will go up, the debt level will go up, and soon enough, the Fed’s balance sheet will go up. This will be supported by Treasury's fiscal agent who will swear to us that Quantitative Easing is the only way forward.
