Embedded in the Democrats’ recent $1.9 trillion Covid-recovery fiscal package was an unapologetic distribution of money in the form of a cheque for $1,400 per US adult, all 127 million of them, at a total cost of $325 billion. The instruction was clear: go out! Spend! Enjoy! While unsubtle, it is hardly a new strategy and it is certain to be repeated somewhere, sometime. But what is of great interest to the technical nerds and the anoraks who follow fiscal and monetary policy is where the money came from. The Federal Reserve (Fed) employs a number of complex strategies, and has several buckets where assets are lodged. One is the US Treasury Deposit Account at the Fed which, until recently, held $1.3 trillion of cash. As revealed to a House of Lords Economic Affairs Committee hearing by Charles Goodhart, a former court member of the Bank of England, it has come to light as reported in The Times that Janet Yellen, US Treasury Secretary and former Chairman of the Federal Reserve, decided that those 127 million cheques (known colloquially as “stimmy checks”) should be drawn on that Treasury Deposit Account. That is to say, the Treasury took direct responsibility for an injection of $325 billion into the money supply.

Control of the money supply, clearly one of the most fundamental elements of monetary policy, is strictly the province of the central bank, not the Treasury. The Fed is independent of government and yet here is a former Fed Chair, Janet Yellen, now Joe Biden’s new Treasury secretary, not only parking her tanks firmly on her immediate successor’s lawn but doing his job for him.

Arguably this is arcane, irrelevant; what does it matter where the money comes from if it gets the job done? Even if the central bank is independent, having the Fed and the Treasury as the two key economic agents of the state coordinating their activities is a sensible approach in any mature, integrated, symmetrical economic structure (a necessity denied to the eurozone, there being no fiscal union with which to partner the existing monetary union). That is quite correct. But simultaneously two fundamental principles have been broken in Washington which chip away at the integrity of the system: one, that the Fed does not directly fund the government; and two, that the Fed, and only the Fed, controls the money supply. The first principle is always susceptible to the suspicion that the mutual relationship between the two is a triumph of smoke and mirrors (one levelled against the Bank of England too), but that latter principle is key: the money supply and its velocity (the rate at which it circulates) are fundamental drivers of inflation; inflation management is the central plank of the Fed’s official mandate and the principal driver of monetary policy; if there is a second supplier of money, the Fed’s ability to control inflation is impeded. The future of inflation is a hot enough topic as it is without the blurring of the responsibility lines adding to the risk. Let us hope Janet Yellen’s confusion about her role is a one-off aberration.

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