Implode-o-Meter News - Economists Warn Fed Risks Losing Control Amid Budget Deficits

"This unfavorable fiscal arithmetic might tend to push the Fed toward delaying its exit from the extraordinary easing measures it has taken in recent years; it could even affect decisions this year about how much further to expand the Fed's holdings of longer-term government securities," the authors said. "The Fed could cut its effective drain on the Treasury significantly by putting off asset sales and delaying policy rate increases. But such a response would presumably feed rising inflation expectations."
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"The bottom line is that no matter how strong the commitment of a central bank to an inflation target, fiscal dominance can override it," the authors of today's paper warned. "Without long-run fiscal sustainability, no central bank will be able to keep inflation low and stable."
Fiscal dominance refers to a situation in which a central bank is forced to purchase government debt and finance deficits through inflation.

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Economists Warn Fed Risks Losing Control Amid Budget Deficits