Two recent headlines in the Wall Street Journal speak to America’s changing economic landscape: “Top Fed Official Says New Framework Provides More Humble Approach to Setting Rates” (August 31), and “U.S. Debt Is Set to Exceed Size of the Economy Next Year, a First Since World War II” (September 2).
In my view, the second of these stories provides more insight than the first into what the Federal Reserve will be doing in the months and years ahead. For all of the focus that journalists place on monetary policy, the Fed is ultimately a central bank. And, as Niall Ferguson pointed out in The Cash Nexus, historically the role of a central bank is to enable governments to borrow. Ferguson pointed out that as wars became expensive, rulers found that success in war required the ability to conduct wars on credit, and they discovered that a central bank could help to direct credit their way.
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