Managing the Fed’s new balance sheet

James Hamilton writes:

I recommend instead that the Fed should be buying Treasury Inflation-Protected Securities in the current situation. Tim Iacono
says that’s like the Mafia buying “protection” from itself. But my
point is that TIPS represent an asset that would gain in value at a
time the Fed needs to sell them, meaning that the logistical ability of
the Fed to drain reserves quickly in such circumstances is without

Read his whole post, which ranges more broadly than this quotation would indicate.  It’s one of the best blog posts written this year.  Don’t forget this crystal clear passage:

A second concern I have with the new Fed balance sheet is that it has
seriously compromised the independence of the central bank. To my
knowledge, every hyperinflation in history has had two key ingredients:
(1) budget deficits that could not be resolved politically, and (2) a
central bank that assumed the obligations that the fiscal authority
could not.

I certainly would not predict hyperinflation, but we could be in for some serious contractionary monetary policy in the next five years.


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