Still on the Road to Financial Repression

The Fed’s annual Jackson Hole symposium is intended for participants to discuss the challenges they face and the long-term implications of different ways of thinking about monetary policy. Much like the ASSA conference held every January or the annual ECB conference in Sintra, it’s full of academics giving papers with Greek letters lying on their sides, except that the presenters at Jackson Hole tend to be top-notch academics presenting to the world’s leading central bankers.

Almost every year, at least one paper creates a buzz among attendees. This year, that paper was entitled, “The Race Between Asset Supply and Asset Demand” by Auclert, Malmberg, Rognlie, and Straub (AMRS). The paper modeled the supply and demand for U.S. Treasury debt, and came to the startling conclusion that “debt could reach 250% of GDP without pushing up interest rates”. 

Coincidentally, the nonpartisan Committee for a Responsible Federal Budget published its August forecast incorporating the effects of the OBBB Act and the latest Trump tariffs. The latest projection sees the debt held by the public rise from about 100% of GDP in 2025 to 120% by 2035, an increase of 2% from the Congressional Budget Office’s forecast. An alternative scenario where much of the Trump tariffs are made illegal by the courts would see debt to GDP soar to 134% in 2035.

I had suggested about a month ago that fiscal dominance and financial repression is almost inevitable: The Fed will be faced with a regime characterized by high fiscal deficits and growing pressure for the Fed to help finance. The Fed will follow the path of the BoJ of cutting short rates, restarting quantitative easing and yield curve control to suppress long rates (see Will the Next Fed Chair Matter Much to Policy?). The AMRS paper raises questions about the level of flexibility available to monetary authorities in the coming years.

The full post can be found here.

 

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