Vantage Point is a new monthly rotating column featuring timely insights from Wharton faculty.
I retired from the Federal Reserve on June 30, 2025, after dedicating 10 years to the organization, including my service on the Federal Open Market Committee. I have resumed my position as Rowan Distinguished Professor at the Wharton School after spending a decade at the institution Americans rely on during economic uncertainty.
My time at the Fed taught me a valuable lesson: Prudent monetary policy is an essential underpinning of the American economy. But it cannot solve every economic problem. The Federal Reserve should not address problems stemming from fiscal and structural issues, because that approach will not address the underlying issues — and may even make them worse.
The Limits of Monetary Policy in a High-Debt Era
The Federal Reserve has two clear mandates from Congress: maintaining price stability and achieving the highest possible level of employment. The Fed uses its interest rate tools, balance sheet management, and public statements to address major economic disruptions, such as the pandemic and the most severe inflation increase since 1980. Those tools matter. They can cool excess demand and support the economy during downturns.
But these tools cannot replace sound fiscal policy, nor can they repair long-standing structural weaknesses in the economy. This point has been underscored by the growing body of research on monetary–fiscal interactions, including recent work by John Cochrane of the Hoover Institution. His core insight is one many central bankers recognize instinctively: Inflation control ultimately depends on the interaction between monetary and fiscal policy, specifically on whether public debt is credibly backed by future surpluses. Monetary policy does not operate in a vacuum.
My time at the Fed taught me a valuable lesson: Prudent monetary policy is an essential underpinning of the American economy. But it cannot solve every economic problem.
The United States faces an era marked by both long-term budget deficits and high national debt levels. In that environment, interest rate increases designed to fight inflation also raise the government’s debt-service costs. Without a credible fiscal response, monetary tightening becomes less effective over time. During my years on the FOMC, I often emphasized that the Fed’s tools work best when fiscal policy is sustainable. Monetary policy can temporarily reduce inflation, but it cannot sustain stable expectations on its own.
Why Fiscal Pressure Crowds Out Investment in People
We often talk about deficits “crowding out” private investment, and that is real. Government borrowing absorbs capital that might otherwise fund innovation, productivity growth, and wage gains. But there is a second, quieter form of crowding out that deserves equal attention: crowding out of public investment in people.
The rising federal budget interest payments create difficulties for sustaining present-day discretionary spending at its current levels. The first round of budget reductions focuses on workforce development programs and job training initiatives and employment barrier elimination programs because these programs need extended periods to generate their benefits instead of pursuing quick political advantages.
Throughout my tenure at the Philadelphia Fed, I argued that workforce development is not a peripheral social policy; it is core economic policy. A healthy economy depends on people being able to connect to work, build skills, and advance. Even during periods of strong headline employment, too many Americans remain sidelined by structural barriers: lack of affordable childcare, transportation challenges, health constraints, outdated credentialing systems, and hiring practices that prioritize degrees over demonstrated skills.
The belief I held about economic growth led us to establish the Economic Growth & Mobility Project (EGMP) at the Philly Fed. The research examined how economic growth creates or blocks opportunities for social advancement among individuals, their families, and their communities. The research showed that growth alone does not create stability, as sustainable growth requires participation by all segments of society in its development.
A central component of that work was our research on “opportunity occupations,” jobs that pay above the national median wage and are accessible to workers without a four-year degree. These roles exist across sectors, including advanced manufacturing, healthcare, and logistics. Yet access to them is uneven, often blocked by credential requirements, limited training pathways, or limited information about career ladders.
The economy receives its most valuable long-term financial benefits from workforce development initiatives, which organizations tend to view as optional.
To make this research actionable, the Philly Fed developed tools, such as the Occupational Mobility Explorer, that allow policymakers, educators, and workforce practitioners to see how workers move between occupations, which skills are required, and where targeted investments could unlock mobility. The message was clear: With the proper training and support, many workers could move into higher-paying roles. Without those investments, opportunity remains theoretical.
These are precisely the kinds of initiatives that are endangered when fiscal pressures crowd out public investment. Workforce development is often treated as discretionary, even though it delivers some of the highest long-term returns available to the economy. Public investment is at risk because fiscal pressures force cuts to essential funding for these initiatives. The economy receives its most valuable long-term financial benefits from workforce development initiatives, which organizations tend to view as optional.
A similar logic underpins the Digital Land Grant proposal I recently discussed in a Fortune op-ed with two colleagues. The first land-grant colleges established by the U.S. government brought economic transformation through their mission to provide practical education in agriculture and engineering to all citizens. A contemporary digital land-grant initiative would provide similar support for 21st-century technologies, including artificial intelligence and advanced computing systems.
The objective extends beyond acquiring additional degrees because it aims to provide workers nationwide with essential skills that can be obtained through community colleges, regional universities, and industrial collaboration programs. The investment is a strategic move that enables business growth through improved operational performance and generates new business opportunities. The political stability of these investments is at risk because debt service expenses consume most of the available budget funds.
Restoring Fiscal Capacity for the Next Crisis
The Penn Wharton Budget Model underscores this point by making fiscal tradeoffs explicit. Its analysis shows that current debt trajectories are unsustainable over the long run, yet it also identifies practical paths forward. Stabilizing the debt does not require ideological purity. It requires realism: combinations of revenue reforms, spending discipline, and growth-enhancing investments that protect vulnerable populations while restoring fiscal capacity.
Stabilizing the debt does not require ideological purity. It requires realism.
That capacity matters. Without it, the nation enters the next downturn or crisis with fewer options. Without it, monetary policy is asked to compensate for fiscal imbalance, something it was never designed to do.
After 10 years in the Federal Reserve System, I am convinced that we ask too much of monetary policy and too little of ourselves. We debate interest rates when we should be debating priorities. Our disagreement over inflation management obscures the core issue between us, namely, our shared commitment to supporting growth and infrastructure development.
My return to Wharton has deepened my belief that solutions exist for all these problems. We know how to strengthen workforce pipelines. We understand the methods that help minimize employment obstacles that do not need to exist. The path to fiscal policy sustainability lies in methods that support economic expansion.
What we lack is not economic insight; it is political follow-through. Monetary policy can create the conditions for stability. It cannot, on its own, secure the nation’s economic future. That requires sound fiscal policy, serious investment in people, and a willingness to move past partisan ideology toward practical solutions.
The Fed can do its job. But it cannot do everyone else’s.
