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On The Margin
The Fed’s Tools Aren’t Made For Fiscal Dominance | Lyn Alden
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.
54:57
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Quick takeaways
- The Federal Reserve's traditional tools are becoming less effective in controlling inflation due to the prominence of monetized fiscal deficits.
- Ongoing debates about the debt ceiling in the U.S. significantly affect liquidity in financial markets and can influence asset prices.
Deep dives
Inflation Management in Fiscal Dominance
Current tools used by the Federal Reserve to manage inflation primarily revolve around bank lending and interest rates. However, in the unique economic landscape of the 2020s, excessive bank lending has not been the primary driver of inflation, as it was in previous decades. Instead, inflation has become more correlated with monetized fiscal deficits, making traditional interest rate hikes less effective in controlling inflation. This indicates a shift toward understanding fiscal policy as a dominant force in managing inflationary pressures.
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Discover
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