By Ellen Brown / Original to ScheerPost

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The Federal Reserve’s independence is currently being challenged by political forces seeking to reshape its mandate. The Fed has not always been independent of Congress and the Treasury. Its independence was formalized only in 1951, with a Treasury-Federal Reserve Accord that was not a law but a policy agreement redefining the relationship of the parties. In the 1930s and 1940s, before the Fed officially became “independent,” it worked with the federal government to fund the most productive period in our country’s history. We can and should do that again.

In a Sept. 1 Substack post titled “Fed Faces Biggest Direct Challenge by a President Since JFK – and This Is a Good Thing” , UK Prof. Richard Werner shows that there is no evidence that more independent central banks deliver lower inflation. In fact, per his findings, central bank independence has no measurable impact on real economic performance, and greater central bank independence has resulted in lower economic growth.

This two-part series will probe the forces in play now to overhaul the Fed, and the feasibility of redirecting it to use its tools, including “quantitative easing”, not just to save the banks but to save the economy. Part I looks at a particularly flawed Fed policy — Interest on Reserves (IOR)  — which burdens the budget, stifles liquidity, and subsidizes banks. Then it suggests ways that eliminating IOR and reining in the Fed’s independence could solve the Treasury’s interest burden altogether.

A Unique Opportunity for a Fed Overhaul.

In a paper in the Spring 2025 edition of The International Economy titled “The Fed’s New ‘Gain-of-Function’ Monetary Policy,” Treasury Secretary Scott Bessent argued that “overuse of nonstandard policies, mission creep, and institutional bloat are threatening the central bank’s monetary independence.” He called for “an honest, independent, and nonpartisan review of the entire institution and all of its activities, including monetary policy, regulatory policy, communications, staffing, and research.”

In a July 17 CNBC interview, former Fed governor Kevin Warsh went further, calling for sweeping changes in how the central bank conducts business and suggesting a policy alliance with the Treasury Department. Warsh is considered one of three or four finalists to take over as chairman after Jerome Powell at the Fed.

On August 25, Pres. Trump then sparked a political firestorm when he declared he was firing Federal Reserve Governor Lisa Cook “for cause,” citing mortgage fraud allegations from Federal Housing Finance Agency Director Bill Pulte. An NBC News report observed:

“Cook’s legal battles are playing out against a broader struggle over the long-held political independence of the Federal Reserve. Trump and several of his officials, including Pulte, have attacked Powell in a months-long campaign to pressure the central bank into significantly cutting its benchmark interest rate, arguing it would stimulate the economy. “

On Oct.1, the United States Supreme Court temporarily blocked the attempt to remove Governor Cook by delaying a decision on a ruling from a lower court that allowed her to stay in her position until the high court hears oral arguments in the case in January.

On Aug. 8, Fed Governor Adriana Kugler resigned, and in September, Trump pick Stephen Miran was confirmed as her replacement. The Daily Rip observed that Cook’s removal, alongside Kugler’s sudden resignation, could give Trump a 4-to-3 board majority to push for lower interest rates, in order to ease the $37 trillion national debt’s servicing costs.

But if easing the national debt servicing costs is the goal, lowering interest rates won’t do much to further it. The Fed has control only of the fed funds rate, which is short-term. Marketable securities make up the vast majority of the debt held by the public, and most of those securities are notes and bonds with fixed interest rates and maturities ranging from two to 30 years. These existing obligations continue to accrue interest at their fixed higher rates until they mature.

A More Effective Target: Interest on Reserves.

While political reshuffling grabs headlines, the real target of the Administration’s moves may be that little-known Fed policy called Interest on Reserves. So argues an August 28 Heresy Financial podcast, which observes that IOR costs taxpayers $186 billion annually by paying banks a hefty interest to hold their reserves at the Fed. By eliminating IOR, the Administration could not only save this $186 billion but would release the $3.3 trillion now sitting idle in reserve accounts to other investments, most likely Treasuries, where banks could get a comparable safe return. The result would be not only to restore Fed profits to the Treasury but to lower federal borrowing costs.

The Fed says it needs IOR as a tool to control short-term interest rates, which it needs to be able to do to control inflation. By paying substantial interest on reserves, the Fed ensures that banks don’t flood markets with cash by over-lending, triggering price inflation. But the Fed managed rates through open market operations before 2008 without IOR, showing it is not essential; and it is a very costly tool.

The Crushing Financial Burden of IOR.

The Federal Reserve has paid interest on bank reserve balances since 2008. As of May 2025, the Fed was paying 4.4% on $3.3 trillion in reserves, totaling $186 billion annually. These payments are deducted from the Fed’s earnings, which by law are returned to the U.S. Treasury after deducting the Fed’s costs, reducing the federal deficit.

In 2021, Fed remittances to the Treasury totaled $79 billion. In 2023, high IOR costs led to Fed losses of $114.3 billion. This not only halted remittances to the Treasury entirely, it created a net deficit to the Fed that will have to be repaid from future taxes to cover its costs. A St. Louis Fed report said it could take years before the Fed is able to once again return profits to the government.

As of the beginning of September, the national debt is at $37.4 trillion and interest payments for FY2025 are at $933 billion — the third largest category of federal expenditure after Social Security and Medicare. Lost remittances force the Treasury to borrow more at higher rates, pushing 10-year Treasury yields up to 4.2% as of September 26. A proposed bill to eliminate IOR estimates savings of $1.1 trillion over 10 years by restoring Fed profitability and remittances.

IOR has other downsides besides loss of remittances to the Treasury. It incentivizes banks to park funds at the Fed, earning over 4% risk-free, rather than using their reserves to back riskier commercial and consumer loans. Since bank lending is the source of the vast majority of the circulating money supply today, IOR reduces the money supply, constrains liquidity, and throttles lending to businesses and consumers.

Before 2008, banks lent freely, and funds held in reserve accounts were minimal. Reserves surged to $2.7 trillion by 2014 and remain high, reflecting substantially reduced lending. Commercial and industrial loans grew only 2.1% annually from 2020 to 2024 compared to 5.6% pre-2008, starving small businesses of capital.

A Subsidy for Big Banks at the Expense of Taxpayers.

Critics of IOR argue that it is a subsidy for large banks, rewarding them for holding idle funds rather than fostering economic growth. Meanwhile, taxpayers face rising borrowing costs. Credit card rates averaged over 25% and 30-year fixed rate mortgages hit 6.3% in September.

IOR, which is now over 4%, sets a floor on the fed funds rate — the rate at which banks lend to each other — since they won’t lend for less than they can make at the Fed. It thus keeps borrowing costs high, contradicting the Fed’s goals of maximum employment and stable prices. Ending IOR would force banks to either lend or invest in Treasuries, aligning their incentives with economic growth.

Part 5 of a Cato Institute series called “Reforming the Federal Reserve” concludes:

“At its core, the IOR policy is a government subsidy to large financial institutions. Banks now have their own risk-free savings accounts, giving them returns that are hundreds of basis points higher than what regular consumers receive on their own deposits at the very same institutions. If that isn’t bad enough, the billions that banks receive in interest payments have reduced their incentive to lend in the private market, reducing the cash available to regular Americans to borrow while flooding the banking system with trillions in reserves.

… The Fed has disbursed billions in risk-free government payments to large banks.… This policy is economically costly, threatens the Fed’s mandate to stabilize prices, and is unfair to everyday Americans.”

Quantitative Easing: Another Fed Tool for Bank Rescue that Could Be Diverted to Public Investment.

Eliminating IOR would produce substantial savings, but like lowering the fed funds rate, it would not fix the federal debt problem since it would not address the $10 trillion in annual debt rollovers or long-term debt. Making short-term debt cheaper could also encourage more government borrowing without curbing spending, worsening the debt cycle.

A more effective way to fix the debt permanently would be to pay it, or at least some portion of it, with government-issued money. Quantitative easing (QE), in which the Fed creates new reserves to purchase assets, is another Fed tool that today has served the banks alone. But the precedent for Fed “money-printing” has been set, and if it can be done to save the banks, it can be done to save the public. Critics say this would inflate consumer prices, but Part II of this article will counter that objection with some very successful non-inflationary precedents.

During “QE1” (2008-2010), the Fed purchased $1.25 trillion in mortgage-backed securities (MBS) — many of them distressed or illiquid — directly from banks and government-sponsored entities. This removed toxic assets from bank balance sheets and transferred them to the public. As Joseph Stiglitz observed, “We socialized losses, even as we privatized gains.” The Fed absorbed toxic assets and inflated asset prices to recapitalize Wall Street, while leaving homeowners and small businesses behind.

In a September congressional hearing, Stephen Miran pointed to a rarely discussed third mandate of the Fed. Besides price stability and maximum employment, it is required to moderate long-term interest rates. Miran argued that this mandate offers a legal and strategic opening for QE to serve public investment rather than private speculation.

But Even QE Can Provide No Federal Debt Relief Under IOR.

Quantitative easing has periodically been proposed as a way to tackle the federal debt crisis. With $9.2 trillion in Treasury debt maturing annually, in four years the Fed could theoretically shift the whole $37 trillion debt onto its own books through QE and return the interest it earns on the bonds to the Treasury. The debt would still be there, but it would be an interest-free debt to a partner government agency, the Fed. Under current laws and policies, however, there are two obstacles to this solution:

1. The Primary Dealer Restriction: The Fed is not allowed to buy securities directly from the Treasury. It must buy from “primary dealers” on the open market like everyone else; and these dealers (mostly very large banks) park the funds they receive for the trade in their reserve accounts, on which the Fed pays IOR.

2. Net Loss from IOR: As of May 2025, the Fed was paying 4.4% on reserves but earning only around 3.3% on Treasury securities. So rather than returning the interest from the bonds to the Treasury, this QE maneuver would actually cause the government to lose $101 billion annually on the $9.2 trillion in bonds ($9.2 trillion × 1.1% (4.4% – 3.3%). The banks, not the Treasury, would reap the benefits.

A Call for Reform.

Changing these rules requires legal changes or a cooperative Fed board, which faces resistance from the banking lobby profiting from IOR’s $186 billion windfall. The Fed has issued trillions of dollars in reserves to save the banks, its real constituents. Would it do that to save the government? Only if its interests were aligned, as they were in the 1930s and 1940s.

Either the independence of the Fed needs to be curbed or the Treasury needs to issue money directly, as Abraham Lincoln did. As will be shown in Part II of this article, this solution has substantial successful precedent both in the U.S. and abroad; it need not create inflation, and it is the monetary “secret sauce” of our largest competitor, China. By directing central bank liquidity toward infrastructure and industrial policy, the People’s Bank of China stabilizes prices, supports employment, and reduces long-term borrowing costs. The question is not whether QE can serve the public, but whether the Fed will choose to wield its mandate for that purpose.

Central banks must be accountable not just to their banking constituents but to Congress and the people they represent. If we’re legalizing QE for Wall Street, then it’s time to fund QE for Main Street.

First published on ScheerPost.com.

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By Steve Keen
21 March 2023

In “A Simple Solution to the Banking Crisis That No Country Will Implement” (Patreon link; Substack link—both open access), I argued that The Fed could end the current crisis simply by buying all outstanding Treasury Bonds at face value. After that, in future The Fed should either let Treasury run an overdraft on its account at The Fed, or The Fed should purchase Treasury Bonds directly from Treasury.

Neither of these practices are unprecedented: as I noted in that post, The Bank of England let the UK Treasury operate an overdraft during Covid, while The Fed routinely purchased bonds directly from Treasury before The Banking Act of 1935, and occasionally even after that—notably, during WWII.

Kenneth D. Garbade, a Vice-President of the New York Fed, explained the origin of the practice of requiring The Fed to only purchase bonds in the secondary market in “Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks” (Garbade 2014). It’s hard to read his history and not conclude that the current system—which requires Treasury to sell bonds to private banks and “primary dealers”, rather than to The Fed—was based on the rickety pillars of the self-interest of bond traders, and delusional ideas about money held by the mainstream economists who staff The Fed, and misinform our politicians.

The Abstract to Garbade’s paper highlights how Keystone Cops-like—to mix my analogies—the whole kerfuffle over direct Fed purchases of Treasury Bonds was:

1) Why did Congress prohibit direct purchases in 1935 after they had been utilized without incident for eighteen years, 2) why did Congress provide a limited exemption in 1942 instead of simply removing the prohibition, and 3) why did Congress allow the exemption to expire in 1981? (Garbade 2014, Abstract. Emphasis added)

As Garbade noted, direct Fed purchases of Treasury Bonds had not led to the sky falling—nor any other calamity—in the years before the 1935 Act. So why prohibit them then? The best reasons he could find in the literature were that this was done “to prevent excessive government expenditures”. The Federal Reserve Chair from 1934 till 1948, Marriner Eccles, put it this way in 1942:

“The restriction forbidding Federal Reserve banks to buy Government obligations except on the open market was imposed … on the theory that forcing the Government to borrow on the open market would afford a check on excessive public expenditures”. (Garbade 2014, p. 5, quoting Eccles)

Eccles followed up in 1947 with the explicit statement that this theory was erroneous:

Those who inserted this proviso were motivated by the mistaken theory that it would help to prevent deficit financing. According to the theory, Government borrowing should be subject to the “test of the market.”

[T]here was a feeling that [the absence of a prohibition] left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget. (Garbade 2014, p. 6, quoting Eccles)

Though Garbade queries both reasons on logical and empirical grounds, they are nonetheless the only ones he proffers—and humanity is hardly deficient in actions undertaken for illogical or empirically fallacious reasons. So arguably, and on the word of one of the most famous Chairmen of all time—for good reasons, for a change—the requirements that the Treasury should not run an overdraft, and also should not sell bonds directly to The Fed, reflect self-interest and ignorance of the monetary system, rather than logic and experience.

Technical stuff.

The rest of this post is for nerds: if you’re interested in what how a monetary system would operate without government bonds, or with government bonds being purchased directly by The Fed, read on.

One clear advantage of both approaches is that it clears away the veil of unnecessary complexity created by believers in Neoclassical economics, to reveal the simplicity at the heart of fiat money creation: the government, as the fundamental creator of a nation’s money, creates money by incurring negative financial equity for itself, and generating identical positive financial equity for the non-government sectors of the economy.

No Government Bonds.

Governments create “fiat money” by spending more than they get back in taxation: if the government didn’t run regular deficits, but instead ran a balanced budget, there would be no “fiat money” in existence. In fact, deficits have been the norm for the last century, as Figure 1 shows.

Figure 1: The average government deficit is more than 3 percent of GDP.

If this were done by the Treasury having an overdraft at The Fed, and The Fed also paid interest on Reserve balances (more on that later), then the monetary system would look like Figure 2.

The first table in Figure 2 shows that, when the government runs a deficit, it spends more on the Private Sector than it gets back in taxes. This increases private deposit accounts, and therefore increases the net financial worth of the private sector. So, rather than borrowing money from the private sector when it runs a deficit—which is what economic textbooks claim, the government creates money for the private non-bank sector.

The second table in Figure 2 shows this from the point of view of the banks. As well as creating Deposits—which are a Liability of the banking sector—it also creates Reserves, which are an Asset of the Banking Sector. I also show the Banks receiving interest on their Reserves, since a legitimate role of bonds is to pay interest to banks to cover the social role they fulfil of maintaining the country’s payments system. If they didn’t have bonds, then there would be a legitimate case to pay them interest on Reserves. This interest income creates positive financial equity for the banking sector.

The final two tables show how these operations—the Deficit, and paying interest on Reserves—affects the two primary wings of the government, the Fed and the Treasury.

Figure 2: A fiat money system with no government bonds.

The deficit doesn’t alter the net equity of the Fed, because as a Deficit reduces The Fed’s liability to the Treasury—the Treasury’s “General Account” in the USA—it increases its liability to the private banks at the same time, in the form of their Reserve accounts at the Fed.

Interest payments on Reserves does affect the equity of the Fed however: the interest payments are made by the Fed going into negative financial equity. This would be catastrophic for a private bank—negative equity for a private bank means bankruptcy, which is what happened to the Silicon Valley Bank. But The Fed isn’t a private bank, and Central Banks can operate with negative equity (Bholat and Darbyshire 2016, p. 15).

For the Treasury, a deficit reduces its financial equity, and sustained deficits would ultimately drive the Treasury’s General Account into the red as well. But this negative financial equity for the Treasury is the mirror image of the positive financial equity that the Deficit creates for the non-bank private sector.

Summarising this system in terms of financial equity, the Deficit creates positive financial equity for the non-bank private sector, while interest on Reserves creates positive financial equity for the private banking sector.

Some people might object to the government being in negative financial equity—hello, my Austrian friends!—but that’s ignorant on at least three fronts.

Firstly, financial assets are claims on someone else: your financial assets are other people’s financial liabilities. By construction therefore, the sum of all financial assets and liabilities is zero. Therefore, if the government were in positive equity, the non-government sectors would be in identical negative equity. Does that sound so attractive now?

Secondly, financial assets aren’t the only form of assets. There are also nonfinancial assets—things which are assets to their owners, but a liability to no-one. For the private sector, it’s things like houses; for the government, it’s things like roads, schools, hospitals, etc. The paranoia about the government’s negative financial equity has meant decades of deficits that are too small, and—for America in particular—not enough nonfinancial assets have been constructed because of the irrational obsession with a balanced budget.

Thirdly—and again, hello Austrians!—even if the Austrian wet dream of a purely private monetary system were enabled by a government that always ran a balanced budget, this would mean that the private non-bank sectors must be in negative financial equity. This is a corollary of the definition of bankruptcy for a bank: it is bankrupt if its Liabilities exceed its Assets, and to function properly, it has to maintain positive equity. Therefore, the private banking sector must be in positive equity, which would mean—in a pure credit economy—that the non-bank private sector would necessarily be in negative financial equity.

I think this structural dialectic is why, when governments get seduced by the siren song of running a surplus, the private sector almost always indulges in an bacchanalian private-debt financed orgy of speculation on the value of nonfinancial assets—primarily houses and stocks—which almost always ends in a financial crisis.

Direct Fed bond purchases.

Figure 3 shows the situation when The Treasury issues bonds to cover both the Deficit and Interest on Reserves. The outcome doesn’t change for the non-government sectors: the Deficit creates money (and net financial assets) for the non-bank private sector, while the Interest on Reserves creates money (and net financial assets) for the banking sector.

Figure 3: The financial flows when The Fed buys Bonds directly from the Treasury.

Likewise, the aggregate situation for the government sector—the Treasury plus The Fed—doesn’t alter either: it goes into negative financial equity to enable the non-government sectors to go into positive financial equity.

The differences, therefore, are more nuances than fundamental changes. With the Treasury issuing bonds to cover both the Deficit and Interest on Reserves, and The Fed buying them, the Treasury’s account at The Fed remains constant and positive. Interest payments no longer push The Fed into negative equity. Instead, all of the negative equity of the government sector is now concentrated in the Treasury.

Conclusion.

There is no substantive difference between these two alternatives to the current situation, but the sale of bonds by the Treasury to the Fed in the second case has the cosmetic benefit that, as under current laws, the Treasury’s account at The Fed remains positive. This eliminates the obvious negative optic of the government appearing to be running an overdraft with the Central Bank, and spending from that overdraft indefinitely. Instead, the Treasury spends from a deposit account that is always positive, and wears its negative equity on its own books rather than on The Fed’s.

The advantage of both situations, and especially the second, is that the fiction that the government borrows from the private sector when it runs a deficit disappears. Far from borrowing money from the private sector, the government, through both its Deficit and paying interest on Reserves, creates money for the private sector.

The case of direct Fed bond purchases is also just a hair’s breadth different to the current situation: there is nothing, absolutely nothing, preventing The Fed from reproducing the essence of this model today by simply buying, on the secondary market, all the bonds the Treasury currently sells to banks on the primary market.

This enables us to kill that old and stubborn furphy of the government debt being, to quote that father of Neoclassical economic fantasists Gregory Mankiw, “an unjustifiable burden on future generations” (Mankiw 2016, p. 557). It is in fact a gift to current generations, which lets them achieve positive financial equity, while the deficit itself—if it were large enough—would enable the creation of substantial nonfinancial assets for the country.

References.

Bholat, David, and Robin Darbyshire. 2016. “Accounting in central banks.” In, edited by Bank of England. London.

Garbade, Kenneth D. 2014. ‘Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks’, Federal Reserve Bank of New York Staff Reports, No. 684.

Mankiw, N. Gregory. 2016. Macroeconomics, 9th edition (Macmillan: New York).

First published on Building A New Economics.

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Stephanie Kelton  — 18 September 2022

When I wrote this column for the New York Times in early April 2021, I encouraged the Biden administration to think differently about how to respond to any unexpected pop in inflation. Inflation wasn’t a raging problem at the time, but some economists were starting to muse about the possibility of a breakout in prices. In the same month that my article appeared, the Bureau of Labor Statistics (BLS) reported that consumer prices had risen at an annual rate of 2.6% in March. The following month, they confirmed that inflation had accelerated at its fastest pace in more than 12 years, jumping to a year-over-year rate of 4.2% in April. We had an emerging problem on our hands.

My piece was full of ideas about how to tackle a potential—but not yet real—inflation problem. I wrote about supply bottlenecks, immigration and trade policies, taxes, lowering health care costs, building manufacturing capacity, and more. I described a whole suite of inflation-dampening policies, many of which were later embraced by the administration and by some of the economists who initially dismissed my piece on the grounds that mainstream economics tells us that any inflation threat can easily be contained by monetary policy. I explained in this thread why I disagreed with that view.

And while some mainstream economists now agree that broadening the inflation-fighting toolkit is a good idea, they still insist that indiscriminate interest rate hikes are the weapon of choice and that the Federal Reserve must go long and hard in order to slay the inflation dragon.

Here’s former Treasury Secretary Larry Summers, commenting on where he thinks the Fed needs to take interest rates now that the August inflation data appears to have taken a more modest path for future rate hikes off the table:

Gradualism and tentativeness are not the best approach. We must be firm and resolute.

My feeling is they’re going to have raise rates more. I think it would help if the Fed were more realistic and honest.

Even as the prospect of more aggressive Fed tightening raised expectations of a more severe economic slowdown and threw financial markets into turmoil, Summers made the rounds to deliver this reassuring message.

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As always, one must read Summers’ public declarations with care. He is always careful to leave himself with an exit, should the need for backpedalling arise. He does it here by attaching carefully-chosen adjectives: “…MAJOR example…EXCESSIVE speed…LARGE cost…” He’s attempting to rule out any historical example of a policy-induced calamity by rhetorical design.

Summers (and others) want us to understand the current bout of high inflation as evidence that policymakers overstimulated the macro economy, causing it to “overheat.” To bring inflation back down, he (and others) insist that interest rates and unemployment need to move much higher.

For more than a year now, Larry has flogged the Fed for being too slow to remove the punch bowl. Now that they’ve “fallen behind the curve,” Summers insists that Powell & Co. must make up for lost time by jacking interest rates—and unemployment—way up.

Sound scary? Not to Larry. Remember, there are no major examples where the central bank forced a large cost onto the society by reacting with excessive speed to bring down inflation.

What Is the Possible Impact of Fed Rate Hikes?

Plenty of people, including this history professor from UC Santa Barbara, immediately countered Summers, reminding us that rate hikes have indeed caused immense suffering.

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For more on the history of policy-induced calamities, I suggest reading this Public Policy Brief by MMT economists Yeva Nersisyan and L. Randall Wray. Here are some excerpts:

[T]he Fed has never managed to guide the economy to a soft landing with rate hikes. Many point to Fed Chairman Paul Volcker’s interest rate hikes in the 1970s—to 20 percent and beyond (and above 15 percent for a couple of years)—as an example of using monetary policy to quell inflation. But the economy crashed into deep recession, and a series of financial crises (the thrift crisis of the early 1980s, the developing country debt crisis later in the 1980s, and the big bank crisis at the end of the 1980s) can all be traced to Volcker’s experiment. Chairman Greenspan’s tightening in the early 1990s brought on a recession followed by our first jobless recovery, and his tightening in 2004 helped to bring on the global financial crisis and another, even longer, jobless recovery….

Realistically, the only way in which monetary policy can affect inflation is by significantly slowing down the economy and raising unemployment sufficiently to alleviate wage pressures—which, as we have argued, are not now driving inflation, but are simply trying to catch up to price increases. Small rate hikes do not reduce inflation; it takes large rate hikes that create financial crises, insolvency, and bankruptcies severe enough to crash the economy—followed by jobless recoveries. In other words, the Fed would be using unemployment as a tool to control the rate of inflation. Killing the recovery also means reversing the progress made recently on raising incomes at the bottom…

It is difficult to foresee how financial markets might react to another recession in conjunction with rising interest rates. We know that the financial sector has become accustomed to 15 years of unprecedentedly low borrowing costs. Will it unravel when faced with negative GDP growth and substantially higher interest rates?

The appropriate solution to inflation would be to work to alleviate supply-side constraints. That, however, cannot really be achieved by monetary policy. In fact, cutting interest-sensitive spending, such as investment, would work to constrain our capacity to produce (i.e., supply) in the future. The pandemic has taught us that the United States must become less reliant on foreign production, and we need massive investments in alternative energy projects to free us from the grip of OPEC-Plus, which includes Russian oil production. We need more domestic investment, not less.

The Fed seems to be embarking on a dangerous experiment.

One might even say that going “full Larry” gives us approximately a 3 in 3 chance of a very bad outcome with large costs that will be borne disproportionately by those who can least afford to bear them.

First published on The Lens.

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