Fed experts saw the risks of the start of a period of fiscal dominance in the United States

The prospect of the transition of the US monetary authorities to fiscal dominance – a system in which the risk of the government’s inability to fulfill its obligations becomes more significant than the acceleration of inflation – has ceased to be far-fetched. These conclusions were reached by the FRS experts in the article “Fiscal dominance and return to zero rates on bank reserves”.

“Purely arithmetically, the growth trends in the U.S. public debt and budget deficit are such that they will eventually lead to an outrageously high public debt-to-GDP ratio,” writes Charles Kalomiris, associate professor of economics, politics, and history at the University of Texas at Austin, in an article for the Federal Reserve Bank of St. Louis (part of the FRS system). At some point, the accumulation of budget obligations and the growth of its deficit may begin to “dominate” the task of the central bank to contain inflation, writes Kalomiris. Such a risk is more than real in the relatively short term, the expert says.