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America’s biggest bank just issued a warning on the future of the Federal Reserve.
In a new report, JPMorgan Private Bank tells investors to prepare for a potential structural shift as the US grapples with its massive debt burden.
“In the most extreme scenario, the Treasury holds an auction and buyers are nowhere to be found. We see a more subtle risk. In this scenario, instead of a sudden spike in yields, policymakers make a deliberate shift. They tolerate stronger growth and higher inflation, allowing real interest rates to fall and the debt burden to shrink over time.”
JPMorgan says that this strategy, known as financial repression, could compromise the independence of the central bank by effectively allowing inflation to erode the real value of the debt over time.
The Federal Reserve’s Open Market Committee (FOMC) is mandated to keep inflation at just 2%.
“We could see a less straightforward path to reduce the U.S. government’s debt load. Policymakers could erode Fed independence and effectively inflate the debt away by driving a stronger nominal growth environment characterized by higher inflation and, over the near term at least, lower real interest rates.”
