The Fed's independence doesn't mean isolation. A functional working relationship with the Treasury is crucial for practical matters like ensuring Treasury market liquidity and coordinating bank regulation, areas where responsibilities overlap.
While AI is expected to be disinflationary long-term, its immediate impact could be inflationary. The massive capital expenditure required to build AI infrastructure will significantly increase demand in a fully employed economy before the productivity benefits are realized.
Beyond formal councils, a key communication channel between the Fed Chair and Treasury Secretary is a traditional, regular breakfast meeting. These bilateral talks occur without staff present, allowing for candid, high-level coordination.
Despite their public prominence, the Fed Chair only has one of twelve votes on the FOMC. Their influence stems from persuading committee members. Chairs avoid being outvoted by understanding the committee's consensus and sometimes aligning with it rather than forcing a losing vote.
For over a decade, Fed forward guidance and QE have suppressed interest rate volatility. A shift away from this communication strategy would likely cause volatility to return to the more "normal," higher levels seen before the 2008 global financial crisis.
Trump's nomination of Kevin Warsh for Fed Chair created unusual political divisions, drawing support from mainstream liberals like Jason Furman while facing opposition from others like Paul Krugman, unlike typical partisan confirmation battles.
Contrary to the popular memory of him letting the 90s boom run hot, Alan Greenspan's Fed aggressively hiked rates to 6.5% by 2000. This was a preemptive move to curb inflation and irrational exuberance, even amid strong productivity growth.
Often seen as standard practice, explicit forward guidance is a recent innovation. It was created out of desperation post-2008 when rates were zero and the Fed needed a tool to reassure markets it wouldn't prematurely hike. Successful chairs like Volcker and Greenspan never used it.
To ensure smooth policy decisions, modern Fed chairs like Jerome Powell personally call all 18 voting and non-voting FOMC members before each meeting. This intensive, bilateral communication process is key to building consensus and setting the meeting's agenda.
Because the Fed pays interest on reserves, Quantitative Easing (QE) doesn't function like traditional money printing. Instead, it effectively swaps long-term government debt (like bonds) for short-term floating-rate debt (bank reserves), altering the maturity composition of government liabilities.