Will the Next Fed Chair Matter Much to Policy?

As reporters tried to elicit the Fed’s reaction function from Jerome Powell during the July post-FOMC press conference, Bloomberg’s Michael McKee asked a very different question relating to the juxtaposition of fiscal and monetary policy in the years ahead:

McKEE: Do you have concerns about the cost to the government of keeping rates elevated for longer in terms of interest rate charges?
POWELL: We have a mandate, and that’s maximum employment and price stability. It's not something we do to consider the cost to the government of our rate changes. We have to be able to look at the goal variables that Congress has given us, use the tools they have given us to achieve those goals. That's what we do. We don’t consider the fiscal needs of the federal government. No advanced economy's central bank does that...If we did do that it wouldn’t be good for our credibility nor the credibility of U.S. fiscal policy. So it’s just not something we take into consideration. 

The question highlights the difficult head facing the U.S. Treasury and the Federal Reserve in the coming years. How will the government cope with higher interest expense from the growing debt, and what steps will the Fed take to cushion the blow? Powell reverted to the textbook answer of the Fed’s dual mandate, which also subtly underlined the importance of central bank independence.

Such an approach may not be sufficient for future Fed Chairs. Trump has already made it clear he wants the Fed to cut rates. Regardless of who he appoints, the next Fed Chair will face increasing pressure to bend monetary policy to the needs of the growing interest burden from fiscal policy. While it’s highly likely that the next Fed Chair will be more dovish than Powell, it may not matter given the pressures. Future Fed policy is becoming subservient to fiscal policy.
 

Welcome to the era of Fiscal Dominance.

The full post can be found here.

  

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