US Treasury's debt-issuances are keeping inflation above the Fed target

livemint.com:

Also read: Wall Street today: US stocks mixed, Fed minutes & Jackson Hole in focus We calculate that ATI has so far reduced coupon issuance by more than $800 billion, delivering a degree of stimulus similar to that of a 100-basis-point reduction in the Fed’s policy rate. Put another way, the Treasury has effectively offset all the Fed’s 2023 interest-rate hikes. Not only that, but the ATI has been supplemented with forward guidance, indicating that it will persist for another few quarters, to the other side of this year’s US election.

Combined with higher estimates of so-called neutral policy rates, the current issuance and interest-rate policies mean that there is little restriction on the economy. With the Treasury blocking the Fed’s attempts to cool inflation and growth, it is little wonder that both metrics have remained persistently above target. If the ATI is not quickly reversed, it may become a permanent policy tool, because both parties will want to use it to stimulate the economy ahead of elections.

We will have entered a world of politicized business cycles, where policy stimulus is synchronized with the polls. This prospect is disturbing for the same reasons that threats to central-bank independence are. To unwind its ATI, the Treasury will need to retire $1 trillion worth of excess bills.

This would temporarily (for a few years) raise long-term yields by 0.5%, but these would ease to a permanent 0.3% rate, with an attendant repricing of risk assets. The cooling effect on the economy would be similar to that of a two-point hike in the Fed’s policy rate. The Treasury’s activist issuance strategies have stimulated the economy in the run-up to an election and blocked the Fed’s own efforts to cool inflation.