In their 2011 paper Former Senior Vice President and World Bank Group Chief Economist Carmen Reinhart, and International Monetary Fund Economist Maria Belen Sbrancia brilliantly explain the “pillars” or economic conditions of financial repression and demonstrate how it is effective in the liquidation of government debt.
A term introduced in the 1970’s, financial repression is marked by ceilings on interest rates of government debt and the creation and maintenance of a captive domestic audience, meaning domestic financial institutions, business entities and households are regulated and motivated to purchase and hold government debt. Along with a steady dose of inflation these conditions amount to an invisible tax of negative interest rates, or a transfer from savers to borrowers. (Reinhart & Sbrancia, 2011)
The Federal Reserve System is the central bank of the United States responsible for conducting monetary policy under a dual mandate given to it by congress “so as to promote effectively the goals of maximum employment, stable prices and moderate long term interest rates.” The Federal Reserve controls three tools of monetary policy—open market operations, the discount rate, and reserve requirements. (Federalreserve.gov)
See Fed Functions: Conducting Monetary Policy
The balance sheet of the Federal Reserve has reached nearly $9T dollars, with increased purchases or easing occurring in the wake of the ’07-08 financial crisis, and again as a response to the slowdown caused by the COVID-19 pandemic and skyrocketing unemployment.
The Federal Open Market Committee (FOMC) has ended purchases and the reinvestment of maturing securities, what they define as balance sheet “runoff,” having also begun to increase the federal funds rate in increasing increments to 1.50 to 1.75 percent in June after starting 2022 at .00 to .25 percent.
The 10-year U.S. Treasury yield, generally referenced as a risk free rate, sat at 2.98% at the end of June, while CPI reached 8.6% annually in May according to Bureau of Labor Statistics release, and Personal Consumption Expenditures (PCE), the prefered measurement of inflation used by the Fed, reached 6.8% on an annual basis.
Review our Inflation Primer
According to the World Bank’s recently released Global Economic Prospect’s report Russia’s invasion of Ukraine has compounded the damage of the COVID-19 pandemic creating increased risk of a period of stagflation, or slow growth accompanied by elevated inflation.
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