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Goodfriend [2001] advocated an understanding or agreement between the Fed and Treasury on credit policy, analogous to the 1951 Accord. (6) A new "credit accord" that assigns to the Treasury the responsibility for all but very short-term lending to solvent institutions would have a number of advantages, I believe. On a practical level, at some point in the future, the Fed will need to withdraw monetary stimulus to prevent a resurgence of inflation when the economy begins to recover. That time could arrive before credit markets are deemed to be fully enough "healed" to warrant winding down particular credit programs. If monetary policy and credit programs remain tied together, as they currently are, we risk having to terminate credit programs abruptly, or else compromise on our inflation objective. Separating credit programs from monetary policy would make it easier to devise a successful "exit strategy," and would reduce market uncertainty about how any potential tension between monetary and credit policies will be resolved.

Government lending, whether by the Fed or by the Treasury, fundamentally represents fiscal policy in the sense that it channels taxpayer funds to private sector entities. The presumption ought to be that such lending is subject to the checks and balances of the appropriations process laid out in the Constitution. Using the Fed's balance sheet is at times the path of least resistance, because it allows government lending to circumvent the Congressional approval process. These risks entangle the Fed in attempts to influence credit allocation, thereby exposing monetary policy to political pressures.