Fiscal Dominance Takes Center Stage
A growing shift in U.S. economic governance is taking shape as Raoul Pal warns that liquidity control may move from the Federal Reserve to the Treasury. He says the transfer could reshape debt funding, liquidity injections, and bank operations. This change suggests increasing political control over monetary tools. It also positions the Treasury to direct liquidity flows through banks, using bill issuance for injections and rollover support.
Pal states that “the groundwork is being laid to move liquidity operations from the Fed to the Treasury.” He says the goal is to create direct authority over debt funding and rollover tasks. He notes that banks could soon serve as the conduit for liquidity actions. He explains that this structure uses bill issuance as the core tool for injections. He also says this move signals “state/politically managed debasement via fiscal dominance.”
Fiscal dominance occurs when fiscal needs shape monetary choices. It forces a central bank to adjust policy in support of government financing. It also reduces the independence of the central bank. Pal notes that this shift removes the “non-political” balance expected from an autonomous institution.
Examples from some Latin American economies show how weak independence can create inflation risks. These cases show the harm that comes when political leaders control monetary actions. They also show how credibility can weaken when a central bank cannot act freely.
Fed–Treasury Tensions Increase
Recent commentary adds context to Pal’s warning. The OMFIF research group says rising debt and large deficits raise the chance of stronger Treasury influence. It says the Fed may face growing pressure to adjust its goals around price stability. It also notes that the boundary between monetary and fiscal policy may continue to fade.
Federal Reserve Governor Stephen Miran provides a separate view on this shift. He explains that the Fed faces “regulatory dominance” that restricts its balance-sheet options. He says the regulatory structure binds banks. He notes that these rules shape the Fed’s decisions more than fiscal pressure.
Miran adds that discussions are underway on balance-sheet runoff. He says this option may return once regulatory revisions are finished. He mentions review topics that include bank-regulation principles. He also says officials are debating whether Treasury securities should meet leverage-ratio rules.
A New Liquidity Era Takes Shape
This shift raises a broader question: could markets accept liquidity control driven by political needs?
Raoul Pal says the potential Treasury-led structure changes every part of the liquidity cycle. He notes that quantitative easing, rate tools, and guidance could all shift. He also says asset inflation may return once new liquidity systems settle. He states that “fix the plumbing first, then open the floodgates.”
For digital asset and macro-market communities, this change matters. It affects how inflation hedges behave. It shapes demand for alternative stores of value. It also changes how investors understand debt supply, currency direction, and collateral needs.
Pal says the next liquidity era may rely less on the Fed’s balance-sheet expansion. Instead, it may rely on Treasury-directed actions that move through banks.