Chapter 8
Would Stimulus without Debt Undermine the Fed’s Independence?
Would stimulus without debt undermine the current degree of independence of the Federal Reserve from Congress and from the president? I contend that the answer is no for two reasons: (1) The Fed would decide when and whether to transfer funds to the Treasury for fiscal stimulus, and if so, how much; (2) the Fed would decide whether and how much to adjust its monetary policy instruments, taking into account its transfer (if any) to the Treasury, the fiscal stimulus enacted by Congress, its mandate from Congress to pursue high employment and low inflation, and everything else (for example, whether there is a financial crisis). Thus, stimulus without debt does not require the Fed to make the transfer to the Treasury for fiscal stimulus in a severe recession, or specify how large the transfer must be; nor does it tell the Fed how much to adjust its monetary policy instruments. Stimulus without debt would therefore preserve the current degree of independence of the Federal Reserve. In this chapter I don’t address the important question: What is the socially optimal degree of independence of the Fed from Congress and from the president? This is a book about stimulus 150
