A President’s budget is the clearest signal of his priorities, and we keep finding gems buried in the White House document released under holiday weekend cover on Friday. Well, maybe gems isn’t the right word, but consider the budget’s not-so-subtle message to the Federal Reserve about interest rates.
The budget includes economic assumptions for growth, prices, interest rates and unemployment. In Table S-9 on page 60 we learn that White House economists are assuming negative real interest rates all the way through the end of the 10-year budget window in 2031.
The budget anticipates that inflation will remain contained between 2.1% and 2.3% a year through 2031. This may be wishful thinking, but let it go. The budget also assumes that the average annual interest rate on three-month Treasury bills will remain below the inflation rate for all 10 years. The rate will be 0.2% in 2022 and never go higher than 2.2%, which it reaches in 2031.
The budget also assumes that the 10-year Treasury note will stay below the inflation rate through 2024. The White House has the 10-year Treasury never rising above 2.8% during the decade, even as the unemployment rate hits 3.8% in 2023 and stays there through 2031.
In other words, the White House is assuming that the Federal Reserve will maintain negative real interest rates despite eight years of full employment. Yet somehow inflation will remain contained.
These estimates aren’t engraved in stone. Events happen, circumstances change, and economic assumptions will change with them. The real meaning of these White House estimates is the message President
is sending to the Fed: His agenda requires that the central bank keep interest rates abnormally low, even below the inflation rate, for the entire Biden Presidency.
Democrats need the Fed to keep interest rates low so interest on the soaring federal debt doesn’t begin to crowd out the rest of the budget. It also needs the Fed to monetize the new debt via bond purchases, lest market demand for U.S. debt fall and interest rates need to rise to attract enough foreign and domestic buyers. Fed Chairman
has saluted over the last year and keeps buying $80 billion in Treasurys each month.
Fed officials insist in speeches that they’re independent of the Treasury and will do what it takes to avoid an inflation breakout. But the numbers and message in the Biden budget explain why that won’t be as easy politically as Fed officials aver.
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Appeared in the June 3, 2021, print edition.