“I Have Bills to Pay,” Or Why the Fed Really Cut Interest Rates

by
Jane L. Johnson
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Disclaimer: The following is a parody of a “leaked” transcript of a recent telephone conversation between Federal Reserve Chairman Jerome Powell and Secretary of the Treasury Janet Yellen.

Powell (answering phone): Powell here.

Yellen: Jay, how you doing, Janet here, been meaning to call you one of these days.

Powell: What’s on your mind over there at Treasury?

Yellen: Well, I see that you’re lowering interest rates, so I just wanted to tell you that’s great news for us over here at Treasury. We’re always looking for ways to save money, what with all this debt we’re trying to manage and pay interest on. When I was in your job, we were able to keep interest rates historically low, barely above zero, and no one much talked about the size of the federal debt or paying interest on it. Now it’s become a headline issue everywhere, though I still don’t see anyone stepping up to do anything about it. You and I have our jobs to do, and both Congress and the President keep on spending. I just get stuck paying the bills. And then every so often we run up against a debt ceiling that requires some fancy footwork to handle.

Powell: Well, I get stuck assuring there’s adequate liquidity in the economy and cheap loans for the federal government. Of course you know that we didn’t lower interest rates for any political reason or to keep interest payments under control. No, we follow the data in setting monetary policy. I’m still getting some flack about the Fed’s large balance sheet that predates your and my time in this job, as you know, but everyone seems to like the results of all this debt on the Fed’s books so I doubt it will come back to haunt us. I expect to be nominated and confirmed for a second term no matter who becomes president, at least if we can keep unemployment reasonable, though the influx at the border does bother me a bit. Besides, the big bulk-up on the Fed’s debt ownership began with someone before you and I took over, so we can always blame him for it.

Yellen: Say, since we’re talking debt, I also wanted to give you a heads-up about our upcoming Treasury debt auctions because I look forward to some Federal Reserve participation. Week after next we’re doing a 2-year note offering for 69 billion dollars, a 5-year for 70 billion dollars, and a 7-year for 44 billion. We haven’t scheduled a 20- or 30-year auction at this time. Ditto for any future TIPS [Treasury Inflation Protection Securities]. You know we always manage our credit needs carefully to time them with scheduled spending needs.

Powell: Oh, I know you do. But I don’t know how much we can participate in those upcoming debt auctions. As I said, I’m under the gun on the size of the Fed’s balance sheet, so I have to be careful.

Yellen: Sounds as if you have some misgivings about participating in our debt auctions. But hey, we both work for the same employer, and we know there has to be some coordination and cooperation if our employer is to succeed. What do you mean, you may not be able to provide the funds we need for these auctions? Our Treasury Department checking account is in your system’s district banks, so we’re one of your customers, and you’re responsible for generating infusions to our account as we need them. I’ve got bills to pay!

Powell: I hear you, but sometimes people start to ask questions about the Fed’s independence and I get a little nervous when I hear that talk. But sit tight and I’ll see what I can do on this end.

Yellen: Hey, on a different matter that might make life easier for both of us, the other day I had an inspiration that you might want to think about. How about forgetting the unpleasant business of collecting taxes? I hate overseeing the IRS because everyone hates the place, and it should be abolished. Should be easy to do if we just coordinate and work together and explain convincingly why we can stop collecting taxes. The secret is to just begin issuing enough debt to pay for everything that way instead of bothering with taxes. Everyone will love it.

Powell: Hmm, an interesting notion. Maybe those MMT people have the right idea after all. Create all those bank reserves and print all that money, and don’t worry about repaying the debt because it’s denominated in dollars, our own sovereign currency that we can always print more of. I’m still worried, though, about the Federal Reserve’s large balance sheet. And I wonder if Congress and voters would catch on to what we’re doing with taxes?

Yellen: I wouldn’t worry about Congress. If those elected nitwits could ever get their act together to figure it out, I’d be surprised. No, the way to go is just to do it. Should be a piece of cake. We just auction off a little more debt every week and no one will know the difference.

Powell: I’ll think about this. In the meantime, I have to get going here to check the latest economic stats, and think ahead about our schedule for future interest rate cuts. Nice talking to you, and thanks for calling.

Yellen: Great, and let’s stay in touch.

Powell: You got it.

The Upshot

The conversation ended at this point as both parties hung up. Might these two powerful individuals, in their official capacities heading their respective powerful entities of the US federal government, pursue Yellen’s suggestion to cancel taxes and fund all federal spending with debt? Stay tuned on this developing story.