The Fed's recent rate cuts, despite strong economic indicators, are seen as a capitulation to political pressure. This suggests the central bank is now functioning as a "political utility" to manage government debt, marking a victory for political influence over its traditional independence.

Increasing political influence, including presidential pressure and politically-aligned board appointments, is compromising the Federal Reserve's independence. This suggests future monetary policy may be more dovish than economic data warrants, as the Fed is pushed to prioritize short-term growth ahead of elections.

Due to massive government debt, the Fed's tools work paradoxically. Raising rates increases the deficit via higher interest payments, which is stimulative. Cutting rates is also inherently stimulative. The Fed is no longer controlling inflation but merely choosing the path through which it occurs.

'Fiscal dominance' occurs when government spending, not central bank policy, dictates the economy. In this state, the Federal Reserve's actions, like interest rate cuts, become largely ineffective for long-term stability. They can create short-term sentiment shifts but cannot overcome the overwhelming force of massive government deficit spending.

Under "fiscal dominance," the U.S. government's massive debt dictates Federal Reserve policy. The Fed must keep rates low enough for the government to afford interest payments, even if it fuels inflation. Monetary policy is no longer about managing the economy but about preventing a debt-driven collapse, making the Fed reactive, not proactive.

The debate over Fed independence is misplaced; it has already been compromised. Evidence includes preemptive reappointments of regional bank presidents and outspokenness from governors concerned about being bullied, indicating the Fed no longer operates in its prior insulated environment.

Tyler Cowen predicts the US will eventually resort to several years of ~7% inflation to manage its national debt. This strategy, while damaging to living standards, is politically more palatable than raising taxes or cutting spending. Rapid, AI-driven productivity growth is the only plausible alternative to this outcome.

The U.S. government's debt is so large that the Federal Reserve is trapped. Raising interest rates would trigger a government default, while cutting them would further inflate the 'everything bubble.' Either path leads to a systemic crisis, a situation economists call 'fiscal dominance.'

In periods of 'fiscal dominance,' where government debt and deficits are high, a central bank's independence inevitably erodes. Its primary function shifts from controlling inflation to ensuring the government can finance its spending, often through financial repression like yield curve control.