Farewell independent Federal Reserve . . . hello modern monetary theory?

The Federal Reserve Open Market Committee (FOMC) April 29th meeting minutes, released this past Tuesday had one rather alarming comment.

“Several participants remarked that a program of ongoing Treasury securities purchases could be used in the future to keep longer-term yields low. A few participants also noted that the balance sheet could be used to reinforce the Committee’s forward guidance regarding the path of the federal funds rate through Federal Reserve purchases of Treasury securities on a scale necessary to keep Treasury yields at short to medium-term maturities capped at specified levels for a period of time.”

Regarding this comment, Stifel Fixed Rate strategist, Chris Ahrens noted,

“The Fed engaged in this type of policy during the war years starting in April 1942 and continuing until February of 1951. In exercising this option, the Fed could be seen as committing to an unlimited expansion of its portfolio and a loss of control of the money supply. It could be seen as a surrender of monetary prerogative in the service of fiscal imperative, i.e., they give up some degree of independence to those making fiscal policy. The main risks are inflation and an explosion of the fiscal deficit, which is no longer facing the discipline of market demand.”


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