Salient to Investors:
A paper written by Frederic Mishkin at Columbia University, David Greenlaw at Morgan Stanley, James D. Hamilton at the University of California in San Diego, and Peter Hooper at Deutsche Bank Securities said:
- The Fed’s hold on policy may weaken should possible losses on its balance sheet coincide with high US budget deficits and an inability of Washington to put fiscal policy on a sustainable path.
- The combination of a massively expanded Fed balance sheet and an unsustainable public debt trajectory could substantially reduce the flexibility of monetary policy, induce a bias toward slower exit or easier policy, and be seen as the first step toward fiscal dominance – and raise the risk of inflation overall.
- No matter how strong the commitment of a central bank is to an inflation target, fiscal dominance can override it, and without long-run fiscal sustainability, no central bank will be able to keep inflation low and stable.
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