“Sending money abroad” is a policy choice. An easy way to reduce the current account would be to reduce the fiscal deficit. I don’t see any commitment that even with lower debt costs, the administration would reduce the fiscal deficit.
I agree. I would have a lot more faith in what the government was doing if the keystone of their policy was a clear "we are going to balance the budget and cut spending heavily." Otherwise, they seem to be "solving" the wrong problems (e.g. tariffs instead of removing the regulatory issues leading to US manufacturing being non-competitive.)
These are all valid points. Maybe interest rates could be lower. No central bank can be 100% independent; how independent should the Fed be? Reserve currency status brings costs and benefits. Isn't the real problem that our polarized politics has stifled genuine, constructive policy debate? Trumps ideas may not be crazy, but they proposed significant disruption. Reform is needed and FAFO is not a great way to accomplish it.
The three "wants" listed in the opening of the article that appeared in the WSJ are those that S. Miron, and S. Bessent put forward a year-ago in the case of S. Miron, and earlier this year in the case of S. Bessent. There is no doubt that the administration desires "easy money", just as there is little doubt that the FOMC is resisting the urge to walk away from its "price stability" and "full employment" mandates. As for the regulatory expansion of the FRB, those accretions that post-date WWII are the result of Congressional acts that passed into law as a result of earlier financial crises which Congress perceived as arising from gaps in the federal law governing banking industry practices. It did not arise because the FRB sought enhanced powers over the bank sector for itself in pursuit of self-aggrandizement (i.e., independent "power" over the banking system for its own sake).
The weakness in the argument is the demand for political accountability. This, coming from the Trump administration, is simply a 'ruse de guerre'. Independence of the Federal Reserve System is coded in legislation adopted over the years since the FRB gained a measure of independence from the Truman administration's treasury department. Since that date, successive acts of legislation ("bills", if you will) have without variation restated the independence of the FRB and increased the degree of independence of the Fed with each new bill passed by Congress and signed into law the then-current president. With those bills, political accountability was repeatedly restated. "The political accountabiilty channel?", you ask. "Congress", the congressmen answer. "You have a republic, if you can keep it", Founder was reported to have once stated. It is not as though the FRB generated these changes on its own.
One might be led to believe, based on Miron and Bessent, and now Cochrane, that the FRB is a rogue player who is using "independence" as a cudgel to defeat the forces of "political accountability" ("pouring boiling water" on the beseigers surging forward against the battlements of the Fed's fortress, to paraphrase JHC).
The opinion ("commentary") piece above overlooks the dynamics of the American banking sector that has had a traditional aversion to centralizing the banking industry in the City of New York. This aversion informed the drafters of the 1913 Federal Reserve Act. That aversion continues to this day. That is why you have 12 Federal Reserve Banks and 12 territories, one for each Federal Reserve Bank, that the Federal Reserve Banks are responsible for. The ownership structure of the Federal Reserve Banks also reflects that aversion to centralized banking control in NYC.
S. Bessent wants to "modernize" the FRB system, ditching the FRBs and their staffs of Ph.D.s in favor of centralized control under the Unitary Executive. That's a Project 2025 goal.
The first step in the plan is to obtain voting control over the Federal Reserve System board of governors. The second step is to fire the 12 sitting presidents of the Federal Reserve Banks, and install new presidents that are simply "rubber-stamps" for the administration to effect the third step. The third step is reduce the independence of the 12 regional Federal Reserve Banks by doing away with the private ownership of those banks by the regional commercial banks in each of the 12 territories. The fourth and final step is to take full control of the FOMC and thereby control U.S. monetary policy. This is the "Argentina on the Delaware River" nuclear option.
You don't believe it? Read Miron and Bessent. They aren't academics wedded to theoretical monetary policy or macro-economic theory. They're private capital investment fund operators (one failed, and one wildly successful). They're the "nuts-and-bolts" crew. And, they mean to seize the wheel-house of U.S. monetary policy and control it for political and financial ends.
Turn to the U.S. dollar -- what makes the U.S. dollar the world's primary reserve currency and NYC the single-most influential money center today? Answer: the willingness to provide liquidity at all times under all conditions to foreign borrowers and governments even at penalty interest rates. See, S. Bessent's bail-out of Millei's government in Argentina with a U.S. dollar to Argentinian peso currency swap arrangement, to be followed-up by a short-term lending facility led by a commerical bank consortium of U.S. money-center banks. See also, the refusal of the U.S. government to condone the seizure of impounded Russian government financial assets and conversion of the same into funds that might be used to finance Ukraine's war effort going forward--to do so would put into question the role of the U.S. dollar as the world's primary reserve currency, and weaken the U.S. government's hold over the global economy and its ability to impose financial sanctions on enemy governments.
"What-if?" musing is an interesting past-time, but not a material source of actionable policy prescriptions.
Just a silly question from an old retired sailor, where does a "balanced budget" fit into this mess? As an old man, I recall the Republican Party of the 1970s and 80s calling for a balanced budget. Guess it isn't need in the 21st century. (Hope I haven't upset anyone.)
The main problem with making the Fed less independent at this point in time is Trump himself. His opinions change on a daily basis, he has an aversion to the truth, and he is self-dealing.
The Fed Board of Governors at least has honest debate and makes informed decisions, even if they are not always accurate. Also they are patriotic, ie they truly care about our country.
It seems to me the claim that permanently lower interest rates implies permanently lower inflation is self-evident, but reverses the causality. If monetary policy is "neutral" in the long-run, then it doesn't affect real interest rates, so a lower nominal rate has to be accompanied by lower inflation. But the lower inflation is the cause of the lower nominal rate. If the Fed tries to lower nominal rates permanently but inflation does not fall, it will have to back off and allow higher interest rates.
“Sending money abroad” is a policy choice. An easy way to reduce the current account would be to reduce the fiscal deficit. I don’t see any commitment that even with lower debt costs, the administration would reduce the fiscal deficit.
I agree. I would have a lot more faith in what the government was doing if the keystone of their policy was a clear "we are going to balance the budget and cut spending heavily." Otherwise, they seem to be "solving" the wrong problems (e.g. tariffs instead of removing the regulatory issues leading to US manufacturing being non-competitive.)
These are all valid points. Maybe interest rates could be lower. No central bank can be 100% independent; how independent should the Fed be? Reserve currency status brings costs and benefits. Isn't the real problem that our polarized politics has stifled genuine, constructive policy debate? Trumps ideas may not be crazy, but they proposed significant disruption. Reform is needed and FAFO is not a great way to accomplish it.
Exciting times that we live in, indeed! Thanks John, for using clear English and facts to point the way forward.
The three "wants" listed in the opening of the article that appeared in the WSJ are those that S. Miron, and S. Bessent put forward a year-ago in the case of S. Miron, and earlier this year in the case of S. Bessent. There is no doubt that the administration desires "easy money", just as there is little doubt that the FOMC is resisting the urge to walk away from its "price stability" and "full employment" mandates. As for the regulatory expansion of the FRB, those accretions that post-date WWII are the result of Congressional acts that passed into law as a result of earlier financial crises which Congress perceived as arising from gaps in the federal law governing banking industry practices. It did not arise because the FRB sought enhanced powers over the bank sector for itself in pursuit of self-aggrandizement (i.e., independent "power" over the banking system for its own sake).
The weakness in the argument is the demand for political accountability. This, coming from the Trump administration, is simply a 'ruse de guerre'. Independence of the Federal Reserve System is coded in legislation adopted over the years since the FRB gained a measure of independence from the Truman administration's treasury department. Since that date, successive acts of legislation ("bills", if you will) have without variation restated the independence of the FRB and increased the degree of independence of the Fed with each new bill passed by Congress and signed into law the then-current president. With those bills, political accountability was repeatedly restated. "The political accountabiilty channel?", you ask. "Congress", the congressmen answer. "You have a republic, if you can keep it", Founder was reported to have once stated. It is not as though the FRB generated these changes on its own.
One might be led to believe, based on Miron and Bessent, and now Cochrane, that the FRB is a rogue player who is using "independence" as a cudgel to defeat the forces of "political accountability" ("pouring boiling water" on the beseigers surging forward against the battlements of the Fed's fortress, to paraphrase JHC).
The opinion ("commentary") piece above overlooks the dynamics of the American banking sector that has had a traditional aversion to centralizing the banking industry in the City of New York. This aversion informed the drafters of the 1913 Federal Reserve Act. That aversion continues to this day. That is why you have 12 Federal Reserve Banks and 12 territories, one for each Federal Reserve Bank, that the Federal Reserve Banks are responsible for. The ownership structure of the Federal Reserve Banks also reflects that aversion to centralized banking control in NYC.
S. Bessent wants to "modernize" the FRB system, ditching the FRBs and their staffs of Ph.D.s in favor of centralized control under the Unitary Executive. That's a Project 2025 goal.
The first step in the plan is to obtain voting control over the Federal Reserve System board of governors. The second step is to fire the 12 sitting presidents of the Federal Reserve Banks, and install new presidents that are simply "rubber-stamps" for the administration to effect the third step. The third step is reduce the independence of the 12 regional Federal Reserve Banks by doing away with the private ownership of those banks by the regional commercial banks in each of the 12 territories. The fourth and final step is to take full control of the FOMC and thereby control U.S. monetary policy. This is the "Argentina on the Delaware River" nuclear option.
You don't believe it? Read Miron and Bessent. They aren't academics wedded to theoretical monetary policy or macro-economic theory. They're private capital investment fund operators (one failed, and one wildly successful). They're the "nuts-and-bolts" crew. And, they mean to seize the wheel-house of U.S. monetary policy and control it for political and financial ends.
Turn to the U.S. dollar -- what makes the U.S. dollar the world's primary reserve currency and NYC the single-most influential money center today? Answer: the willingness to provide liquidity at all times under all conditions to foreign borrowers and governments even at penalty interest rates. See, S. Bessent's bail-out of Millei's government in Argentina with a U.S. dollar to Argentinian peso currency swap arrangement, to be followed-up by a short-term lending facility led by a commerical bank consortium of U.S. money-center banks. See also, the refusal of the U.S. government to condone the seizure of impounded Russian government financial assets and conversion of the same into funds that might be used to finance Ukraine's war effort going forward--to do so would put into question the role of the U.S. dollar as the world's primary reserve currency, and weaken the U.S. government's hold over the global economy and its ability to impose financial sanctions on enemy governments.
"What-if?" musing is an interesting past-time, but not a material source of actionable policy prescriptions.
One only has to look at the actual numbers during Trump 1.0 to prove that low interest rates do not cause inflation.
Interest rates during Trump 1.0 were essentially zero and inflation was under control and less than 2%.
Should we believe actual experience or theoretical economist musings?
Take your time.
Just a silly question from an old retired sailor, where does a "balanced budget" fit into this mess? As an old man, I recall the Republican Party of the 1970s and 80s calling for a balanced budget. Guess it isn't need in the 21st century. (Hope I haven't upset anyone.)
The main problem with making the Fed less independent at this point in time is Trump himself. His opinions change on a daily basis, he has an aversion to the truth, and he is self-dealing.
The Fed Board of Governors at least has honest debate and makes informed decisions, even if they are not always accurate. Also they are patriotic, ie they truly care about our country.
It seems to me the claim that permanently lower interest rates implies permanently lower inflation is self-evident, but reverses the causality. If monetary policy is "neutral" in the long-run, then it doesn't affect real interest rates, so a lower nominal rate has to be accompanied by lower inflation. But the lower inflation is the cause of the lower nominal rate. If the Fed tries to lower nominal rates permanently but inflation does not fall, it will have to back off and allow higher interest rates.