The Fed may not get inflation down to 2%, says Richard Clarida

AS THE Federal Reserve and other central banks have raised interest rates to fight inflation, they have increased the cost of borrowing for governments. Yet many central banks operate in countries where governments run large budget deficits even as they are more indebted, relative to GDP, than at any time since the second world war. High debts have understandably led to worries about “fiscal dominance”, the fear that parlous public finances could constrain the ability—or willingness—of the Fed and other central banks to sustain interest rates at the levels required to hit their inflation targets. Recent fragility in American banks, flowing in part from their exposure to interest-rate risk on vast holdings of government debt, has exacerbated the fear that there are unresolvable tensions in American economic policy.