All articles tagged with #fiscal dominance
Janet Yellen warns that the US approaching a dangerous level of national debt could lead to fiscal dominance, where debt constraints limit the Federal Reserve's ability to control inflation, risking hyperinflation and economic instability, especially as debt surpasses 120% of GDP.
The article discusses Donald Trump's efforts to influence the Federal Reserve to lower interest rates to reduce the US government's rising debt costs, raising concerns about 'fiscal dominance' where fiscal policy overly influences monetary policy, potentially undermining inflation control and central bank independence.
The U.S. economy is expected to be less sensitive to interest rate cuts in the next business cycle, similar to its insensitivity to rate hikes in the previous cycle. This fiscal dominance, characterized by large public debts and deficits, reduces the impact of monetary policy. As a result, the U.S. may experience economic malaise with limited stimulus from rate cuts, affecting investment strategies. Investors should consider a diversified portfolio with stocks, cash-equivalents, and commodities to navigate varying market conditions.
Economist Charles Calomiris warns that the US government's budget deficit could lead to "fiscal dominance," where inflation becomes a tool to pay for expenses, leading to an "inflation tax" on currency and bank deposits. This could cause depositors to move their money out of the banking system, reducing bank profits. Calomiris predicts chronic 8% inflation is a possibility, and investors should avoid long-term Treasury bonds and bank shares. The St. Louis Federal Reserve Bank recently published his paper on fiscal dominance.