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My fiscal policy, my monetary policy, and me; also, nerd EGOT

The words fiscal and monetary seem to be related, so why do we refer to fiscal policy and monetary policy as two separate things? They are, in fact, connected and it’s easy to blur the lines.

Monetary policy - or how much actual money is circulating in an economy - is set and pursued by the central bank of a country, the Federal Reserve of the United States, in this case. The Fed has twin goals, known as the dual mandate: maximum employment and stable prices. If the Fed starts getting an indication that the economy is slowing, for example, it will take steps to increase the supply of money available in the economy. Generally, it would do this by lowering interest rates, which makes it cheaper to borrow money; that would have the effect of encouraging business and consumer behavior. We see this now with the extremely low interest rates, which are undoubtedly influencing the decision to buy a home for lots of you. The Federal Reserve, headed by a Chair of the Board (currently Jerome Powell) and comprising 12 separate Reserve Banks, officially and traditionally operates independently of the government; it’s not funded by Congress and their decisions are not subject to Congressional approval.

FIscal policy, on the other hand, is undertaken by the government itself: these are the tax-and-spend targets that Congress, and the executive, use to influence the economy. Higher government spending - on infrastructure projects, for example - might be enacted in an effort to encourage growth by getting people to work, who would then presumably spend their earnings. These decision, of course, are inherently political and partisan, and often more driven by what lawmakers want the policy to be rather than what economic effect they think will follow. Besides that, fiscal measures are generally thought of as not being as effective in influencing the overall economy as monetary policy is. But it’s undeniable that they are intertwined, and that neither set of decisions can happen in a vacuum: if they are working at cross-purposes, which policy dominates? And how does it affect your personal finances? Interest rates (monetary policy) surely have a measurable short-term impact, both on savings and borrowing rates. The stock market reacts to interest rate changes, because it affects how easily companies can grow. And we’re directly impacted by changes in tax rates; possibly less directly, but no less importantly, by changes in spending priorities.

The Department of the Treasury enacts the fiscal policies passed by the legislative and executive branches. (The IRS, for example, is a bureau of the Treasury Department.) President-Elect Biden’s nominee for Secretary of the Treasury is Janet Yellen, who was herself Fed Chair before Jerome Powell (she was also the Chair of the Council of Economic Advisors, and will be the first to have held all three titles. NERD EGOT!). She is uniquely positioned to understand that intertwining of federal and monetary policy, and is seen as a welcome choice. She’s on record already as wanting Congress to ‘go big” with the next round of fiscal stimulus.

The pandemic required an enormous governmental response, and will undoubtedly require still more. Perhaps the biggest monetary policy response came on March 15 of last year, when the Fed met early and set interest rates at near zero. This was to allow banks to lend and consumers and business to borrow if needed. But in all honesty the ability of the Federal Reserve to blunt the impact of the pandemic on consumers was limited - low interest rates are nice if you’re borrowing, but there wasn’t a problem accessing credit before the crisis, and rates were already pretty low. On the other hand, this is a unique situation where big fiscal strokes can make a big difference: that was the CARES Act. Unemployment insurance, direct payments, availability of business loans via the PPP, suspension of federal student loan interest were all measures of government spending that were meant to stave off a massive economic contraction. It’s generally accepted that the unprecedented circumstances warrant such big moves.


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