Dear Scott,
I. I Wholeheartedly Agree
Thank you for your public service as Secretary of the Treasury of the United States. I read your recent excellent article in The International Economy titled “The Fed’s New ‘Gain-of-Function’ Monetary Policy.” I agree with much of your criticism of the Fed. In addition, I believe that we share the same optimistic “Roaring 2020s” outlook for the US economy, and we both hope that the Fed doesn’t screw it up.
In an internal memo to your colleagues at Keysquare Capital Management dated January 31, 2024, you wrote:
“Our base case is that a re-elected Donald Trump will want to create an economic lollapalooza and engineer what he will likely call ‘the greatest four years in American history.’ Economist Ed Yardeni believes that post-Covid America has the potential to have a boom similar to the ‘Roaring Twenties’ of a century ago. We believe that a returning President Trump would like this to be his legacy. In this scenario, the greatest risk factor, in our opinion, would be a sudden rise in long-end rates.”
In your recent article, you criticize the Fed for attempting to manage the economy with unconventional monetary tools. You rightly observe that the Fed successfully ended the Great Financial Crisis of 2008 by implementing the first round of quantitative easing (also known as “QE1”) in late 2008 and early 2009. In that round, the Fed purchased $1.25 trillion in mortgage securities and $300 billion in Treasuries.
QE1 was consistent with what arguably is the primary job of any central bank: to provide liquidity during such crisis periods. Indeed, the Fed was created at the end of 1913 in response to previous financial crises. Its original central mission was to maintain financial stability.
We both agree that the Fed’s subsequent three rounds of quantitative easing (QE2, QE3, and QE4) were a mistake. When the federal funds rate was cut to zero on December 16, 2008, Fed officials should have acknowledged that monetary policy could do no more to stimulate the economy, leaving fiscal policy to do the heavy lifting.
Instead, the Fed implemented QE2 in November 2010, committing to purchase $600 billion in long-term Treasury securities by the middle of 2011. Fed officials said that their economic model estimated that in effect this would lower the federal funds rate below the so-called “zero lower bound” by as much as 75 basis points. Other central banks around the world adopted similar unconventional policies, including actual negative-interest-rate policies.
On September 13, 2012, the Fed introduced QE3, the third round of quantitative easing. It involved the Fed purchasing $40 billion in mortgage-backed securities per month to inject liquidity into the financial system and stimulate economic growth.
It was open-ended, meaning that the Fed committed to continue purchases until the labor market improved significantly. It was expanded in December 2012 to include purchases of $45 billion per month in Treasury securities. It too was open-ended. The Fed pledged to keep the federal funds rate near 0% until at least 2015.
QE4 was initiated in March 2020 in response to the COVID-19 pandemic. In that round, the Fed committed to making unlimited purchases of Treasury and mortgage-backed securities to support the economy. As you note,
“the Fed extended its liquidity tools into uncharted territory, repurposing asset purchase programs as instruments of stimulative monetary policy. These tools were designed to stimulate the economy through various channels, none of which are well understood.” The models used by the Fed to predict the positive impact of unconventional monetary policies were flawed, as you opined.
Even more troubling, as you state:
“The wall of liquidity created by QE flattened the cost of capital across industries and sectors, effectively drowning out the market’s ability to send early warning signals when the real economy shows signs of weakening or of rising inflation.”
In other words, the bond market was rigged. The Bond Vigilantes were stymied from signaling any objections to the Fed’s liquidity flood.
Furthermore, the Fed’s ultra-easy monetary policies following the Great Financial Crisis through the Great Virus Crisis enabled the widening of fiscal deficits, accompanied by mounting federal government debt that could be financed at record-low interest rates. In addition, as you note, the Fed crossed the line “into the realm of public debt management, a role traditionally overseen by the Treasury Department.
This entanglement between the Fed and the Treasury is concerning, as it creates the perception that monetary policy is being used to accommodate fiscal needs, rather than being deployed solely to maintain price stability and promote maximum employment.” The Fed certainly can be accused of mission creep, as you convincingly explain in your article.
To be fair, Fed officials defend themselves by rightly observing that they are required by law to manage the economy. Therefore, they must do everything possible to do so. The Humphrey-Hawkins Act, formally known as the “Full Employment and Balanced Growth Act of 1978,” was signed into law by President Jimmy Carter on October 27, 1978. The Act amended the Federal Reserve Act and required the Fed to pursue two primary goals: maximum employment and stable prices. In addition, a third goal, to pursue moderate long-term interest rates, was included but is rarely emphasized today.
Totally ignored was the Fed’s original mandate to maintain financial stability. That really should be the third mandate and the most important one, in my opinion. According to the original Federal Reserve Act of 1913, the Fed was tasked with providing an “elastic” currency. This meant creating a flexible money supply that could expand or contract in response to economic needs, particularly to prevent seasonal shortages or panics. The Fed was to support banks by rediscounting short-term loans, helping to maintain liquidity in the banking system.
Accordingly, the original Act aimed to improve oversight and regulation of banks to prevent failures and systemic risks. That role wasn’t explicitly stated in the original Act’s text, but it clearly was implied and became central to the Fed’s function during financial crises.
II. I Respectfully Disagree
It’s true, as you noted in your article, that the Fed’s unconventional monetary policies have been partially based on the notion that they would have a positive “wealth effect” on the economy, which has exacerbated wealth inequality to some extent. As a result, the rich got richer, as you said, thanks to the Fed.
You also indirectly referred to the Fed Put when you wrote: “Successive interventions by the Fed during and after the financial crisis created what amounted to a de facto backstop for asset owners. This led to a harmful cycle whereby asset owners came to control an ever-larger portion of national wealth.” I would add that the Fed Put increases excessive risk-taking, which is the source of financial instability. Again, to be fair, it has also been very effective in ending financial crises.
This raises an important question today. You have been leaning on the Fed to implement the Fed Put again now. Even before the recent batch of weak employment indicators, the Trump administration pushed the Fed to lower the federal funds rate significantly. Obviously, that would help to slow the increase the net interest outlays of the US Treasury. It might also provide your deficit financed fiscal stimulus programs with some support from monetary policy.
The odds of our Roaring 2020s scenario might increase if the Fed lowers . However, I presume that neither of us would like to see the decade end as badly as the 1920s did. Ideally, the Roaring 2020s will set the stage for the Roaring 2030s. That might be less likely if the Fed fuels a stock market bubble by cutting interest rates, which would exacerbate wealth inequality during the stock market meltup. The subsequent financial and economic meltdown would reduce wealth and income inequality as everyone got poorer.
In other words, the Fed’s original mandate to avert and to stop financial instability should be a top concern for the Fed and for you.
Financial instability is a real risk at this juncture: As we saw last year, the Fed lowered the federal funds rate by 100 basis points from September 18 through December 18, 2024, yet the 10-year Treasury bond yield didn’t fall but rose 100 basis points. You should beware of the Bond Vigilantes. If bond yields do go higher following a renewed round of cuts in the federal funds rate, will you implement the unconventional measure that your predecessor Janet Yellen did in 2023, i.e., issue more Treasury bills?
In any event, don’t forget the old proverb: “People in glass houses shouldn’t throw stones.” The Treasury, which implements fiscal policy, has been experiencing mission creep for much longer than has the Fed. There have been more and more federal government program outlays financed by borrowing. That’s evident from widening federal deficits and from soaring federal government debt when the economy is growing.
I hope that the administration’s fiscal and regulatory policies work to lower the nation’s debt-to-GDP ratio, as you project. However, it seems to me that you’ve concluded that won’t happen unless the Fed cuts interest rates significantly.
The administration’s tariff policies certainly have boosted federal government revenues. Still, I’m sure you are working on a backup plan should the Supreme Court rule that the Constitution doesn’t grant the administration the power to impose most of these tariffs.
III. Debt Management & Stablecoin
On a separate note, I am aware that you have been a strong supporter of the Genius Act, both before and after it was signed into law by the President on July 18, 2025. You’ve stated that it will provide the regulatory clarity needed for the stablecoin market to grow into a multitrillion-dollar industry.
You also stated that stablecoins, with the proper legislative framework, will expand the use of the US dollar and increase demand for US Treasuries, which back stablecoins.
I understand that stablecoins provide the speed, security, and low cost of blockchain transactions while eliminating the wild price swings that make other cryptocurrencies impractical for many everyday uses. Can you confirm that you are counting on them to finance a significant portion of the federal government’s debt, as most of them might be backed by Treasury bills?
Won’t that mean that the stablecoin money supply will increase dramatically and that the Fed will lose whatever control it has over the money supply? The result could be a very serious and prolonged rebound in inflation. Just saying.
I am counting on you to keep the Roaring 2020s going through the end of the decade.
Sincerely,
Ed Yardeni
