The budget debate in Congress and the future policy decisions of the Federal Reserve are on a "collision course" over the next few years, raising thorny questions over the central bank's independence and the status of its massive Treasury portfolio, CME Group economists Samantha Azzarello and Blu Putnam said.
With the federal budget deficit and the Fed's Treasury holdings each in excess of $1 trillion, there is increasing focus on when potentially the central bank begins selling assets as the economy improves and unemployment declines toward a 6.5% target.
Possible future actions by the Fed may work to make controlling the budget deficit considerably more difficult, as if the decisions over where to cut spending and which tax loopholes to close were not controversial enough already, Azzarello and Putnam wrote in a new analysis.
The Fed "will be drawn into the budget debate in a manner like it has never before experienced, possibly losing some policy-making independence," they said. Moreover, the appointment of the next Fed Chairman "will come right in the middle of this brewing controversy over the Fed's role in budget reduction." A critical issue will be "the potentially severe, negative and unintended consequence" of quantitative easing.
Click here for a related video interview with Blu Putnam, "Could a Central Bank go Broke?"