market has been the traditional vehicle for monetary policy operations in recent decades, the federal reserve act provides authority for the federal reserve to purchase a fairly wide range of other assets - including obligations of federal agencies, certain obligations of state and local governments, foreign exchange, and sovereign debt. moreover, the federal reserve often supplies reserves through repurchase transactions in addition to outright purchases. if the treasury market became less liquid, we could substitute longer - term rps against eligible collateral for some outright purchases of securities. if the existing classes of assets that the federal reserve is authorized to purchase or to acquire were deemed too narrow, we could pursue technical changes in the federal reserve act to authorize transactions with a broader range of assets. still another option would be to expand the role of the discount window in the provision of reserves to the banking system. the key point is that declining treasury debt does not pose any insurmountable long - term problem for the federal reserve. there would, of course, be transitional issues as monetary policy operations adapted. but we surely maintain the effectiveness of our monetary policy operations. so a decision about whether or not to hold on to the surpluses and ultimately retire the government debt should not be affected by any concern that this option might undermine the effectiveness of monetary policy. some have been concerned that the federal reserve and the treasury might be working at cross purposes today to the extent that reductions in the treasury debt supply have lead to declines in longer - term treasury rates at a time when monetary policy is aiming to slow the pace of economic activity to a more sustainable rate. to date, the main impact of treasury operations and debt management prospects has been on longer - term treasury rates, with only a small spillover effect on the financial variables that affect private spending decisions - short - and longer - term private interest rates, equity prices, and exchange rates. to the extent that treasury debt management operations affect the private interest rates or other financial conditions that matter for private spending decisions, the fomc can always adjust its policy settings as appropriate to achieve its objectives. conclusion in debt management as well as other fiscal policy decisions, the administration and the congress should make the decisions that are in the best long - run interest of the economy. monetary policy cannot affect the long - run consequences of such policy decisions, but it can adjust to smooth the economy ’ s transition to the new equilibrium. monetary and fiscal policies should therefore be thought of as working as partners, rather than in competition with each other. in addition

##nowable shocks will surely intervene along the way. my assignment is not to evaluate how much confidence we should have in projected surpluses or to assess the merits of alternative allocations of projected surpluses. rather, my assignment is to connect fiscal and monetary policy decisions. i have emphasized the value of evaluating fiscal policy options in models that incorporate reasonable monetary policy reaction functions. doing so builds in the indirect response of monetary policy to fiscal policy changes, consistent with the logic of the policy mix. this is, in effect, the approach i followed in my discussion of the analytics of the policy mix by assuming that monetary policy is reset - albeit indirectly - in response to a change in fiscal policy. retaining the projected non - social security surplus in the cbo baseline is one alternative. the other options involve increased fiscal stimulus and, as a result, will be accompanied, ceteris paribus, by a higher equilibrium real interest rate in the long run. they would also likely result in a lower share of investment in output and a higher current account deficit than the option that preserves higher surpluses. the specific outcomes will depend on the details, especially on the nature of supply - side incentives in any spending or tax changes. ceteris paribus, monetary policy - run off a sensible reaction function - will end up validating the higher equilibrium real interest rate, to keep prices from accelerating indefinitely. the implications of debt retirement for monetary policy operations one additional consequence of the choice among these options is that preserving the surpluses would lead to a gradual decline in and ultimately the retirement of the federal government debt. the prospects for such an outcome depend, of course, on the realized growth rate of income and hence tax revenue and one ’ s assumption about the starting base of expenditures and the appropriate baseline for its rate of growth. i have already noted that such an outcome should not be viewed as a foregone conclusion. and, even if the treasury debt were to be fully retired, that outcome would be likely to be transitory. once the baby boomers begin to retire, the social security trust fund will be progressively run down, and at some point, the overall budget will likely move from surplus to deficit again. today, treasury securities account for the bulk of the federal reserve ’ s portfolio of assets. treasury securities are a convenient and natural choice for the federal reserve ’ s portfolio because they pose no credit risk and because the depth and liquidity of the treasury market facilitate open market operations. although the treasury