monetary policy

Among the unmourned victims of 2022 is to be found modern monetary theory.  Although it seemed clear from the start that MMT was a product of magical thinking, it engendered insouciance that kept fiscal deficits rising ever higher. Now, Republicans will press for fiscal austerity.  Democrats will fight back, but they too will seek as much fiscal constraint as compatible with gaining power in 2024.  Congress thus will look for new revenue sources that aren’t taxes and quickly find one at the Fed on which both sides agree: cutting payments to the nation’s biggest financial institutions.

It is difficult to calculate just how much the Fed is sending back over the transom into the financial system.  One recent paper estimates it as over $100 billion a year and this might well be the case once interest on bank reserves is totaled up with the interest the Fed pays within the gigantic overnight reverse repo program (ONRRP). Whatever the sum now, it’s large and it will only go up in 2023.  The more rates rise, the more the Fed pays out even as it is still saddled with billions of low-yield portfolio assets.

These interest payments are already on the radar of at least one conservative analyst.  His arguments channel those Republicans raised when these interest payments were last on the fiscal chopping block, a time when Democrats also said pretty much the same about wanting billions for taxpayers, not banks.

To be sure, nothing came of all these …