Much is made by economists and market participants of the importance of Federal Reserve independence. An independent central bank delivers better monetary outcomes over time because it can make decisions focused on the economy rather than the short-term political calendar. Recent developments have drawn ire from left and right: The Fed’s recent abrupt turn from declaring that jumbo rate cuts were off the table to surprising the market with a half-point cut in policy rates right before an election, and former President Donald Trump’s criticism thereof.
And yet, the Fed has never been truly isolated from the rest of government, particularly the Treasury Department. Indeed, coordination between Treasury and the Fed is common, although it is at times veiled. It is most prominent during crises, when the Fed requires authorization from the Treasury secretary to set up emergency facilities for buying certain assets. In coordination with Treasury, the Fed has bought everything from collateralized auto debt to small business loans. And that coordination is well advertised, as policymakers portray a united front to soothe markets.
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Stephen Miran is an adjunct fellow at the Manhattan Institute, co-founder of asset manager Amberwave Partners, and a former senior adviser for economic policy at the U.S. Treasury, 2020–21.
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