In recent decades, advanced economy central banks have set monetary policy independently of fiscal authorities. Their goals were a combination of price stability and maximum sustainable employment. Today, most announce inflation targets, adjust interest rates to keep inflation low and stable, and maintain accountability by answering questions in public.
Yet, economists have long known that fiscal developments can undermine the central bank’s ability to maintain price stability. In this post, we discuss the problem of “fiscal dominance” – when fiscal policy pressures or compels a central bank to forsake its price stability objective in favor of helping to finance the public debt. While heightened levels of public debt in many advanced economies suggest that the risk of increasing fiscal dominance – and of the loss of price stability – is widespread, our focus is on U.S. developments where the threat of fiscal dominance now appears to be acute….
This post – co-authored with our friend and colleague, Richard Berner (NYU Stern School of Business) – was submitted in August 2025 as a comment to the U.S. bank regulatory agencies regarding their proposed modifications to the leverage ratio standards for U.S. global systemically important banks.
To Whom It May Concern:
We write to oppose the agencies’ proposal to alter the enhanced Supplementary Leverage Ratio (eSLR).
In our view, the proposal substantially weakens leverage, total loss-absorbing capacity, and long-term debt requirements for global systemically important banks (GSIBs). As a result, it would reduce key safeguards implemented in response to the 2008 financial crisis and add to the risks of serious financial instability and taxpayer-funded GSIB bailouts that Congress and the agencies sought to eliminate….
As most readers of this blog know, the Federal Reserve is an idiosyncratic mix of public and private. The Board of Governors of the Federal Reserve System is a part of the Federal Government, while the Federal Reserve Banks are private, nonprofit corporations and chartered banks owned by their commercial bank members. The operational capacity of the system – the ability to buy and sell domestic or foreign securities, provide loans to banks or foreign central banks, and engage in repurchase agreements or reverse repurchase agreements – belongs to the Reserve Banks. Then there is the Federal Open Market Committee (FOMC), which sets interest rate and balance sheet policy.
Recent attacks on Federal Reserve independence lead us to ask the following question: Who in the Federal Reserve System controls monetary policy? Put differently, to lower short-term market interest rates as he wishes, what aspect of the Federal Reserve would the President need to control? In this post, we attempt to answer this question.
Our new CEPR Policy Insight examines how three key technological innovations—blockchains, distributed ledgers, and tokenization—could reshape the future of finance. We review the current state of the crypto ecosystem, including its internal payments infrastructure, legitimate and illicit uses, and the reasons why crypto has failed to gain traction as a mainstream payments tool. We then turn to U.S. policymakers’ efforts to promote a “payments stablecoin,” considering the goals of an efficient and safe payments system and the barriers that stand in the way. Finally, we compare stablecoins with tokenized deposits and money market funds that replicate familiar financial assets in digital form but have received far less policy attention. We conclude that stablecoins are unlikely to compete effectively outside the crypto world against these no-less-digital instruments.
The Trump Administration is taking steps to integrate crypto into traditional finance, most notably the GENIUS Act’s establishment of a regulatory regime for “payment stablecoins.” To assess stablecoins’ likely impact on the future of payments, we compare them against a potential competitor that adds programmability and the potential for instant, low-cost cross-border settlement to a well-established bank product: tokenized deposits. Faced with crypto entrants in traditional financial services, the largest banks have powerful incentives to innovate, with the goal of maintaining and expanding their market share.
The Trump Administration’s willingness to abrogate treaties (including those negotiated under the previous Trump Administration) makes U.S. allies doubt a whole host of commitments on which they currently rely. In this post, we focus on the Federal Reserve’s central bank liquidity swaps, which provide a key backstop for global markets in dollar assets. At least twice in the past two decades, this esoteric tool played a major role in sustaining the dollar-based financial system outside the United States, thereby insulating the U.S. financial system from the default, market, and liquidity risk of foreign intermediaries.
Given the crisis-management role that the dollar swap lines play, we can think of no reason why the Fed itself would wish to end them. However, if the Administration or the Congress were to perceive the Fed swap and repo facilities as supporting only foreign institutions, or if they view these facilities as a device to influence foreign behavior, it is easy to imagine pressure on the Fed to drop these crisis prevention and crisis-management tools or to make them conditional.
In this post, we explain what the swap lines are, how they operate, and how an end to the swap lines could lead to financial instability within the United States as well as undermine the use of the dollar and dollar-denominated assets in the global financial system. We then consider how foreign central banks might insulate their banking systems against the risk that they could no longer rely on the swap lines.
Since the 1970s, banking regulators have worked together through the Basel Committee on Banking Supervision to set minimum standards for internationally active banks. The latest agreement, known as Basel III, came in the aftermath the 2008 financial crisis. The United States adopted the initial Basel III rules in 2013. A decade later, U.S. regulators proposed the “Basel Endgame” to implement the final rules agreed in 2017 and 2019.
The 2023 Basel Endgame proposal included a nearly 20 percent increase in capital requirements for the largest banks. The banking industry fiercely opposed the initiative, effectively killing it in its original form. As of this writing, the fundamental question of how or whether the United States will implement the final Basel III standards remains unresolved. This is not just a technical regulatory matter. The outcome will affect credit availability, economic growth, and financial stability—while determining whether the United States maintains its leadership in international financial standard-setting.
In our view, the Basel Endgame proposal unnecessarily conflated two distinct questions: (1) whether the United States should comply with international regulatory standards, and (2) whether the United States should raise large banks’ capital requirements. While there are strong grounds to answer both questions in the affirmative, they need not be addressed together. That is, the United States could implement the final Basel III standards without raising overall capital requirements.
It was only a few months ago that everyone was focusing on the U.S. economy’s exceptionally favorable fundamentals: growth was solid; driven by migration, the labor force was expanding; inflation was receding; and business formation was robust. Adding to this, U.S. capital markets were the envy of the world, as were the research centers that were advancing the technological (e.g. productivity) frontier. These elements of American exceptionalism helped push the real effective value of the dollar to a near-40-year peak in January.
How quickly things change. Chaotic policies – tariffs, overtly preferential treatment, deportations, attacks on universities, slashed research funding, and general increases in policy uncertainty – risk inhibiting growth, sparking inflation, retarding investment, and stunting technological development. Unsurprisingly, this disturbing new mix is leading many people to anticipate a decline of the dollar and to speculate about the loss of safe-haven status for U.S. Treasuries (see our recent post).
In this post we discuss key fundamentals — including heightened policy uncertainty, dollar overvaluation, and the unsustainable fiscal path — that encourage expectations of a shift away from dollar assets and lend credence to private forecasts of a large dollar depreciation. If these projections prove correct, the key question is whether dollar adjustment will be smooth, or whether there will be a will there be a “sudden stop” where global investors abruptly halt (or even reverse) capital flows into the United States?
Recent developments in financial markets are leading people to ask an uncommon question: are global investors, both domestic and foreign, losing faith in U.S. dollar assets? The most prominent evidence for a loss of confidence is the post-April 2 simultaneous decline in the U.S. dollar, the U.S. equity market, and U.S. bond prices, accompanied by a surge in the price of gold. There also are signs of a rising risk premium on those U.S. assets (Treasury issues) that had long been viewed as the safest on the planet (see here).
Previously, when a global shock sharply boosted market risk, investors fled into Treasuries. This time really has been different. In this post, we explore the new risky pattern in U.S. asset markets and consider various explanations, including a change in relative inflation expectations and heightened pressure on intermediaries to deleverage.
The simplest hypothesis is the most troubling: that global investors are losing confidence in the United States and fleeing U.S. assets and the dollar. At this point, we lack hard data to confirm this bleak proposition. However, there may be little warning of an intensified shift away from U.S. assets. If that happens, it will be too late to find low-cost ways to “de-risk” exposure to chaotic U.S. policy developments.
Since his mid-January inauguration, President Trump has introduced tariff hikes that are unprecedented in scale, breadth, and speed. Even after the 90-day partial postponement announced on April 9, the Yale Budget Lab estimates that the average U.S. tariff rate is now 27 percent, the highest level since 1902! While the rate likely will fall closer to 18 percent as U.S. purchases of high-tariffed goods decline, that would still be the highest level since 1933.
Perhaps the most amazing thing about the tariffs is that no one outside the Administration knows why they have been applied. The fact that Administration officials are voicing numerous inconsistent rationales for the tariffs is a key reason for the financial market downturn and heightened volatility. The President’s erratic tariff changes are another. Keeping the tariffs in place likely will lead to stubborn inflation and lower long-term growth. Moreover, record trade policy uncertainty alone probably is sufficient to induce a recession.
In the remainder of this post, we try to correct a common misunderstanding about international trade policy: namely, that higher tariffs, by promoting import substitution, will reduce the U.S. external deficit. The primary mechanism by which tariffs can narrow the external deficit is by inducing a recession. Another, even more damaging, path to a lower deficit would be by reducing the attractiveness of U.S. assets to foreign investors. The danger in this case would be an abrupt loss of confidence that prompts a sudden stop of foreign acquisitions and a plunge of U.S. investment.
