The federal government is right to spend more to help the economy grow — as long as it doesn’t pile up too much debt.
Last week’s meeting of central bankers in Jackson Hole was a kind of victory lap for the Fed. It may have also marked the peak of its power.
The US Federal Reserve’s recent successes are undeniable: Inflation seems to be under control and fears of a recession are fading, allowing the bank to start normalizing interest rates. But a research paper presented last week suggests this may be the Fed’s swan song. In the coming years, it is likely to get weaker, the result of two separate but related developments — one positive, the other negative.
In the last few decades, the Fed has gained extraordinary power over the US economy. This is in part because the federal government was seen as ineffective. Part of the hands-off approach was deliberate; policymakers were wary of micromanaging the economy and were mostly supportive of free trade. And even as deficits rose, there was at least some fiscal restraint — especially after the financial crisis and recession that followed. As my Bloomberg Opinion colleague Mohamed El-Erian noted, the Fed was the only game in town.
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
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