How the Federal Reserve Funds Fiscal Policy

In response to Sen. Richard Shelby’s (R-AL) comment about President Obama’s nomination of Peter Diamond for the Federal Reserve, Felix Salmon says:

This makes no sense at all, from an economics point of view. The budget is set by Treasury and Congress, not by the Fed.

Shelby said:

It would be my hope that the President will not seek to pack the Fed with those who will use the institution to finance his profligate spending and agenda.”

Salmon is referring to the executive and legislative branches controlling fiscal policy while the Federal Reserve controls monetary policy. But the Fed can fund fiscal policy by buying Treasury bonds that finance the spending, a process known as monetizing the debt. So Salmon is wrong. Here.

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