The newest member of the Federal Reserve insists the central bank won’t fall prey to political pressure to keep interest rates low to help the government cheaply finance its huge and growing debt.
“Deficit financing and debt servicing issues play no role in our policy decisions and never will,” said Fed Governor Christopher Waller in a speech to the Peterson Institute for International Economics.
Waller, who joined the board last December, said in his first public remarks the Fed’s actions “will continue to be guided solely” by it legal obligation to ensure stable inflation and low unemployment.
“These congressionally mandated goals always drive our decisions,” Wall said said. “Partisan policy preferences or the debt-financing needs of the Treasury will play no role in that decision.” Fed Chairman Jerome Powell recently reiterated the same view.
Waller said he chose to emphasize Fed independence in his first pubic remarks because “a narrative has emerged” that the central bank will play second fiddle to the U.S. Treasury. The Treasury under both Presidents Biden and Trump has sold massive amounts of debt to underwrite some $5.8 trillion in stimulus spending approved by Congress.
The Fed itself has purchased about $2.5 trillion in Treasurys during the pandemic to keep interest rates low and help foster an economic recovery. Overall the Fed now holds a record $7 trillion in U.S. public debt.
The close cooperation between the Fed and Treasury harkens back to World War Two, the last time U.S. debt levels were as high as they now as a percentage of the economy. The difference between now and then is that the Treasury seized control over interest rates during the war and didn’t give it back to the Fed until six years later after a bout of severe inflation.
Political control over interest rates, Waller said, has often led to misuse.
“When governments run up large debts, the interest cost to servicing this debt will be substantial,” he noted. “Money earmarked to make interest payments could be used for other purposes if interest rates were lower. Thus, the fiscal authority has a strong incentive to keep interest rates low.”
Waller said it’s vital the Fed and Treasury cooperate closely in times of crisis, but when the crisis is over, an independent Fed has to raise rates if necessary to squelch budding inflation even if it increases the government’s borrowing costs.
Only an independent Fed can do that, he said.
“[T]he independence of the Federal Reserve is in the nation’s best interest and should be valued and protected by all.”