The Myth of Fed Political Independence [pdf]

This is a terrible paper. Its chief finding is that the Fed was dovish more frequently than hawkish between 2010 and 2022. That’s not novel, so the author chose a spicy title.

If the Fed is trying to keep rates low, it buys Treasuries. If the government floods the market with Treasuries at the same time, the Fed will buy more to keep rates low. (The Fed can’t directly buy Treasuries, but that’s a separate topic.) That correlation is intrinsic to dovish monetary policy. It doesn’t discriminate on motive.

During the recent deficits, on the other hand, the Fed was pushing rates up. That breaks the correlation the author purports. But if you only measure between 2010 and Q1 2022, you observe more time that the Fed was dovish and so see more correlation. To conclude motive from that, alone, is like concluding the Sun doesn’t exist based on measurements taken between 1 and 4AM.

Maybe this is a methodology paper? The author lacks the data and wants someone to extend their methods? There are serious critiques of the Fed in 2021, but this isn’t one of them.

This paper, with empirical analysis, is another feather in the cap of the growing narrative of "fiscal dominance," that is, how the Fed is less concerned about the inflationary impacts of its QE policies, and more focused on accommodating the budget agenda of the government and its ability/facility to service its debt and make interest payments