While the Federal Reserve has been trying to boost the economy by buying trillions of long-term government bonds, the Treasury Department has been undercutting its efforts by issuing more long-term securities, according to a new report.
The study, released Tuesday and co-authored by former Clinton Treasury secretary and Obama economic adviser Larry Summers, argues that “Treasury’s actions have operated as a kind of reverse quantitative easing,” acting to reverse as much as one-third of the decline in long-term interest rates engineered by the Federal Reserve in the wake of the financial crisis.
Writing with three other economists at Harvard in the paper published by the Brookings Institution, Summers advocates that the central bank coordinate more closely with the Treasury to prevent conflicting debt management policies. Summers was widely thought to be President Obama’s top choice for Fed chairman in summer 2013, before an outcry from Democrats wary of Summers’ ties with Wall Street led him to withdraw from consideration.
In 2010, under then-chairman Ben Bernanke, the Federal Reserve began buying longer-term Treasury securities, as well as mortgage-backed securities, to lower long-term interest rates and mortgage rates to spur investment and spending.
Traditionally, the Fed conducts monetary policy by buying and selling short-term debt to influence short-term interest rates, but with the target short-term interest rate already reduced to zero, the Fed looked to unconventional policies to try to return the economy to health. Since 2008, the Fed has bought nearly $2 trillion in Treasury debt.
Over the same time, however, the Treasury has been extending the average maturity of the debt it auctions off to more cheaply finance the government’s operations. In doing so it worked at cross-purposes with the Fed’s efforts by increasing the supply of long-term debt and pushing interest rates up, the study’s authors write.
To prevent such conflicts, the authors write, a “natural solution would be for the Fed and the Treasury to annually release a joint statement on the strategy for managing the U.S. government’s consolidated debt.” They note the Fed and Treasury have coordinated on debt management before.
Such coordination, however, would likely be interpreted as an infringement on the central bank’s independence by members of Congress who already feel that Fed and Treasury officials coordinate too closely.
In recent months, Fed Chairwoman Janet Yellen and outside monetary economists have voiced concerns over a House GOP bill that would force the Fed to compare its monetary policy decisions to a simple rule balancing unemployment and inflation. But House Republicans have responded that the real threat to the Fed’s independence comes from its interactions with the Treasury.
In July, House Financial Services Committee Chairman Jeb Hensarling said at a hearing with Yellen that “the Fed chair meets with the Treasury secretary once a week. And dare I mention the continuing revolving door between Fed officials and Treasury officials? The threat to the Fed’s independence does not come from the legislative branch. It comes from the executive branch.”
