“Unseen and Unsaid” does some throat clearing in, “Questions for Fed Chair Powell,” specifically:
“As the Fed continues to grapple with persistent inflation, a large balance sheet, and the macroeconomic effects of a ballooning national debt …”
What “struggle?”
· Inflation and inflation expectations are on target.
· The balance sheet is just that
· The macroeconomic effects of current and expected increases in fiscal deficits are one of the things, albeit an important one, that it needs to take account of in setting the values of its monetary policy instruments, in particular the Effective Federal Funds Rate.
The actual issues facing the Fed are:
· How significant for private investment demand is the uncertainty arising from Trumps chaotic tariffs and deportation policies?
· Do the tariffs mal-adjust relative prices to the extent that over-target inflation is called for to permit adjustment?
. How to maintain Fed independence?
Now on to U&U’s questions but pseudo–J Powell’s (Radical Centrist’s) answers. 😊
1. Given the current trajectory of federal debt and interest payments as a share of GDP, what risks do you see to the Fed’s ability to conduct monetary policy independently over the long term?
“In the long run, we are all dead” but over the medium term, none, but you are not going to like the outcomes in that scenario as fiscal policy will have become a serious drag on economic growth.
2. Given [certain past Fed actions] markets have come to expect that the Fed will always be there to keep the Treasury market "smoothly functioning" and/or "liquid." Is this correct? And can this be called a third mandate? Does such a mandate compromise Fed independence?
It is quite difficult to see a conflict between smooth functioning of financial markets and our Congressional mandate – stable prices and maximum employment, in effect to manage inflation so as to achieve maximum growth in real incomes.
Shouldn’t the Fed be more transparent about how its balance sheet policies, including interest on reserves and asset holdings, affect the federal budget?
These have ludicrously tiny effects on the budget compared to the effect of getting the inflation rate too high or too low to achieve maximum growth in real incomes.
4. If Congress remains unwilling to reduce deficits or commit credibly to future primary surpluses, isn’t there a risk that future interest rate hikes could be inflationary, not disinflationary, by undermining the real value of government debt rather than reinforcing price stability? How does the Fed plan to counteract inflation if fiscal policy remains structurally expansionary?
Deficits could become so large that the interest rates need to maintain the inflation target would be large enough that raising the target would damage growth less than the “required” interest rate adjustment. [This is sometimes called “Fiscal Dominance.” https://thomaslhutcheson.substack.com/p/cochrane-on-the-fed ]
Of course, deficits that large would be so detrimental to growth that the additional inflation to slightly mitigate the harm would be the least of our worries.
5. To what extent does the Fed factor in fiscal dominance scenarios, where monetary policy becomes subservient to fiscal needs, into its long-term planning?
I just explained that. 😊
6. Would you agree that years of unconventional monetary policy contributed to the misallocation of capital and a boom in unproductive debt issuance?
No. I’m from Chevy Chase Maryland, not Vienna Austria. 😊
7. An independent Federal Reserve is considered essential to good monetary policy. However, since money policy is Congress's responsibility, would it not be wise to limit Fed discretion to introduce significant “unconventional” (i.e. QE) policy without congressional approval?
No. Congress has specified the outcomes it wants – stable prices and maximum employment. It should leave it up to us how to achieve those outcomes.
8. What steps, if any, is the Fed taking to unwind its influence on long-duration interest rates and allow market signals to function more freely?
Those that are consistent with managing inflation so as to achieve maximum growth in real incomes.
9. As the national debt continues to grow at an unprecedented pace, and pressures grow for the Fed to support Treasury's auctions, how does the FOMC define "normal" and/or "ample" balance sheet?
Whatever is necessary to managing inflation so as to achieve maximum growth in real incomes.
10. The Federal Reserve recently announced a reduction in the balance sheet runoff to just $5 billion a month. Shouldn’t quantitative tightening be proceeding more aggressively, especially given inflation’s persistence and the need to normalize monetary policy?
Inflation is on target and employment high as stable. That’s as “normal” a monetary policy as you can get. 😊
11. Looking back, would you concede that the Fed was too slow to act on inflation in 2021–22, and what institutional changes could help prevent similar delays in the future?
Yes. This is not to say however that we were wrong to have allowed over target inflation in 2020-21, including more than necessary to return the price level to its pre-crisis trajectory. We are still divided on whether we should have begun raising the EFFR in September 2021 or earlier, but yes before March 2022.
Our delay was driven in part by the mistaken practice of announcing movements or non-movements in policy instruments in advance, specifically in confection and publication of the dot plot.
Institutional changes would be:
To make small (maybe less than the traditional 25 basis points) back and forth adjustments in the EFFR and other instruments to signal that policy is indeed data driven and not beholden to expectations of what it will be independent of incoming data.
Request Congress to remove our role in prudential regulation of financial institutions. The admixture of roles presents a risk that:
o Monetary policy may be affected by a desire to cover up mistakes in prudential regulation when they occur or
o Prudential regulation may be shaded to achieve macroeconomic goals
Request the Treasury to begin issuing a marketable nominal Trillionth security
Request the Treasury to begin issuing more intermediate tenor Treasury Inflation Protected Securities (possibly linked to the Fed’s preferred Personal Consumer Expenditure index)
Request that the Bureau of Labor Statistics begin collecting and reporting indexes of wages, not disaggregated remuneration unit value indexes. []
12. Do you see a risk that [involvement in climate risk, racial equity, and inequality] dilutes the Fed’s core mandate and threatens its credibility?
Yes. Managing inflation so as to achieve maximum growth in real incomes is a big enough job. We do not need addition objectives.
Image Prompt: Central Banker testifying before Congress
[Standard bleg: Although my style is know-it-all-ism, I am aware that I could be mistaken or overstate my points. I know there is an amazing range of talents and experience among readers. Bring that to bear by commenting on these posts.]