Supply Shock On the Margin: The Fed’s Tools Aren’t Made For Fiscal Dominance | Lyn Alden
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Jan 23, 2025 
Lyn Alden, a renowned finance and economics expert, shares her insights on the current economic tensions stemming from fiscal dominance. She discusses the ineffectiveness of traditional Fed tools against inflation and explores the implications of the debt ceiling on market liquidity. Alden analyzes the shift from short-term to long-duration treasuries and its potential impact. The conversation dives into the complexities of oil production in relation to inflation, and concludes with reflections on the future of the dollar, Bitcoin, and their roles in a changing economic landscape.
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Fiscal Dominance over Monetary Policy
- The Fed's inflation tools primarily target bank lending and exchange rates.
- However, monetized fiscal deficits, not bank lending, are driving the current inflation.
Debt Ceiling and Liquidity
- The debt ceiling debate affects liquidity, as the Treasury drains cash to pay bills without new debt.
- The Treasury General Account (TGA) draining into markets can create a liquidity tailwind.
Treasury Issuance and Liquidity Risks
- Treasury's focus on bill issuance has maintained liquidity but is unsustainable.
- A shift to longer-term bond issuance could strain liquidity and create tension with the Fed.
