Biden’s budget signal to the Fed


The Federal Reserve Building in Washington, DC


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A president’s budget is the clearest signal of his priorities, and we continue to find gems buried in the White House document released on Friday under Holiday Weekend cover. Well, maybe gems isn’t the right word, but consider the budget’s not-so-subtle message to the Federal Reserve about interest rates.

the budget includes economic assumptions for growth, prices, interest rates and unemployment. From Table S-9 on page 60, we learn that White House economists assume negative real interest rates throughout the end of the 10-year fiscal window in 2031.

The budget forecasts that inflation will remain contained between 2.1% and 2.3% per year until 2031. That may be wishful thinking, but let it go. The budget also assumes that the average annual interest rate on three-month treasury bills will remain below the rate of inflation for all 10 years. The rate will be 0.2% in 2022 and will never exceed 2.2%, which it reaches in 2031.

The budget also assumes that the 10-year Treasury bill will remain below the inflation rate until 2024. The White House has the 10-year Treasury that never exceeds 2.8% over the decade, although the unemployment rate reaches 3.8% in 2023 and remains there until 2031.

In other words, the White House assumes that the Federal Reserve will maintain negative real interest rates despite eight years of full employment. However, inflation will remain contained.

These estimates are not set in stone. Events happen, circumstances change, and economic assumptions will change with them. The real significance of these White House estimates is President Biden’s message to the Fed: his program requires the central bank to keep interest rates abnormally low, even below the rate of inflation, throughout the entire period. Biden presidency.

Democrats need the Fed to keep interest rates low so that interest on the rising federal debt doesn’t start crowding out the rest of the budget. He also needs the Fed to monetize new debt through bond purchases, lest market demand for US debt fall and interest rates rise to attract enough foreign and domestic buyers. . Fed Chairman Jerome Powell praised last year and continues to buy $ 80 billion in treasury bills every month.

Fed officials insist in their speeches that they are independent from the Treasury and will do whatever it takes to avoid a surge in inflation. But the numbers and the Biden budget message explain why it won’t be as easy politically as Fed officials claim.

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Published in the print edition of June 3, 2021.

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