Re: Re: Implications of Surplus Tax Cut?

[Barnet Wagman]

Ellen Frank wrote:

> >Since the surplus is currently being held as government bonds, I would
> >expect a surplus-financed tax cut  to raise interest rates.
>
> Why should this be so?  Why is it all of a sudden conventional
> wisdom that interest rates are determined by the federal
> budget rather than by the Federal Reserve?

Since this is my opinion, I doubt it's conventional wisdom (but I suppose
there's a first time for everything).  These two factors are not mutually
exclusive.  Of course the Fed has some control over interest rates, but
pumping $100b into the bond market also has an effect.

How fully the Fed can control interest rates is not really clear (at least
not to me).  It is clear that they often do not exercise the control that
they do have, so other factors are important.


> Just remember that
> mortgage rates and the prime rate went up last year, even
> as Clinton's Treasury was retiring over $100b in debt.

Exactly.  Without that $100b, presumably rates would have increased even
more.