Quora Answer: Has the Federal Reserve Lost Its Ability to Stabilise the Economy without Constant Deficit Spending?

The following is my answer to a Quora question: “Has the Federal Reserve lost its ability to stabilise the economy without relying on constant deficit spending?”

You have conflated two things.  The question mixes two different jobs.  The Federal Reserve sets monetary policy.  Congress and the Treasury run deficit spending.  The real question is whether the Federal Reserve’s tools still work when fiscal policy has grown too large for monetary policy to offset.  The evidence says no.  The national debt sits near forty trillion dollars.  The Congressional Budget Office reported net interest costs hit US$963 billion over ten months of fiscal 2026.  That is US$3.18 billion a day.  The deficit reached US$1.8 trillion over the same period.  The full year forecast now sits at US$2.1 trillion, US$200 billion above February’s estimate.

A rate cut used to stimulate growth.  Today, it also lowers the government’s own borrowing cost on a debt this size, blurring the line between monetary policy and fiscal rescue.  The Federal Reserve cannot raise rates freely to fight inflation without also raising Washington’s own interest bill past what the budget can absorb.  That is not independence.  That is a central bank negotiating with its own government’s balance sheet before every decision.

Foreign holdings of US Treasuries fell to US$9.299 trillion in June 2026, down from US$9.371 trillion in May.  Japan, the UK, and China trimmed a combined US$61 billion.  China’s holdings dropped to US$633.4 billion, the lowest since September 2008.  Net foreign inflows collapsed from US$56.6 billion in May to US$6.8 billion in June.  An eighty-eight per cent drop in one month.  A thirty-year Treasury auction on 13^th August 2026 cleared at 5.216 per cent, the highest yield on that maturity since 2001.  Demand came in weaker than average.  The stop-out yield priced above what dealers expected.  The market is starting to ask a price the Federal Reserve cannot simply wave away with a policy statement.

The Yen Intervention Failed to Hide the Real Problem

The United States and Japan carried out their first joint yen intervention since 1998, after the yen fell to 163.73 per dollar, its weakest level in nearly four decades.  The New York Federal Reserve sold euros, not dollars, to buy yen.  Japan tapped the Federal Reserve’s own repo facility instead of selling Treasuries outright.  Both governments went out of their way to avoid touching the Treasury market directly.  That both central banks avoided a normal sale of their own reserve currency’s benchmark asset is an admission that the market cannot absorb it cleanly.  An intervention meant to project strength ended up broadcasting the opposite.

Borrowing Short Because Long Has Become Too Expensive

Treasury Secretary Scott Kenneth Homer Bessent leaned on short-term bills for roughly eighty-five per cent of debt issuance in recent years.  Cheaper today.  A rollover risk tomorrow, repeated every few months on a debt this size.  Janet Louise Yellen did this first.  Bessent criticised her for it at the time, then did more of it once he held the job himself.

The Treasury Borrowing Advisory Committee has already flagged a US$1.45 trillion funding shortfall for fiscal 2027 to 2028 at current auction sizes.  A government financing itself on short-term paper is not managing risk.  It is postponing a bill it cannot yet afford to pay in full.

None of these four signals sits in isolation.  Rising interest costs.  Falling foreign demand.  A failed show of strength on the yen.  A funding structure built on the cheapest, shortest-dated paper available.  Each one narrows the Federal Reserve’s room to manoeuvre further.  Monetary policy alone was never meant to carry a fiscal position this large.  It has been asked to anyway, and the strain is now visible in every auction result the market hands back.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code