Your editorial on the Fed and President Biden’s budget (“Biden’s Budget Signal to the Fed,” June 3) discusses “President Biden’s message to the Fed: His program requires the central bank to hold down rates. unusually low interest, even below the inflation rate, for the entire Biden presidency. But the Fed can’t do that.
Interest rates are set in global financial markets. Despite all its powers, the Fed is a player in this market. We have seen low rates because the demand for capital has been low and the supply of capital has been high. While the Fed can cut short-term rates, it cannot keep them below their natural levels for an entire presidential administration.
Your point on the indirect financing of the Fed’s budget deficits is much stronger. Economists call this fiscal dominance: spending authorizations forcing monetary authorities to run into perpetual deficits. The usual result is uncomfortably high inflation. While it’s too early to worry about the misery of the 1970s, these issues are not out of the question.
Alexandre-Guillaume Salter
Texas Technological University
Lubbock, Texas
Kevin Warsh raises serious concerns about the Federal Reserve’s current policy and philosophy towards its free-wheeling management of the US economy (“The Fed’s Risky Fill-the-Punch-Bowl Strategy,” op-ed, June 8). No sane driver approaches a dangerous corner without first braking and slowing down. This is exactly the point that William McChesney Martin (Democratic President and Fed Chairman 1951-1970) made in October 1955, often referred to as the âPunch Bowlâ speech. Martin made one of the clearest and most concise statements ever made by an economist: âIf we don’t get the brakes on enough and on time, of course we’ll go over the cliff. The apparent disregard of this warning by current Fed policymakers runs counter to previous policy and may lead to a reckless outcome that the entire country will regret if we really rush towards that cliff.
Nicolas A. Vlisides
University of Michigan-Dearborn
Mr. Warsh was able to free himself from the Fed’s group thinking and warn us against accelerating inflation and the problem of lags. If inflation takes hold, it is guaranteed that the Fed will be behind in diagnosing the danger since it has already dismissed any rise in inflation as temporary. Any restrictive policy change will suffer from a slow and unpredictable impact lag.
President Jerome Powell’s assurances about the temporary nature of higher inflation are not convincing. What is the Fed’s experience in dealing with a V-shaped recovery after a major pandemic, with all kinds of misunderstood disruptions in the supply chain?
The Fed couldn’t even explain the inflation dynamics of the past 10 years or so, a relatively normal and stable period. He consistently predicted that inflation would be higher than it actually was, and his large doctoral staff. economists have never explained why the 2% target is so elusive. Despite this, and the fact that virtually all inflation indicators are now flashing red, Mr Powell is stepping up.
Em. Prof. Robert F. Stauffer
Roanoke College
Salem, Virginia
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