Powell Says Full Ease Ahead

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Federal Reserve Chairman Jerome Powell on March 3, 2020.



Photo:

eric baradat/Agence France-Presse/Getty Images

Inflation? What inflation? That was Federal Reserve Chairman

Jerome Powell’s

main message to Congress and markets in two days of testimony this week, with a side order of modern monetary theory.

Mr. Powell told everyone not to worry about rising interest rates or soaring asset prices because he and the Fed aren’t worried. “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” he said early and often.

He’s focusing the Fed instead on the full employment half of its mandate. Some 10 million jobs haven’t returned following the Covid-19 lockdowns of the past year, and Mr. Powell and other Fed board members aren’t wrong to suggest the data conceal many other people who have left the job market.

Yet Mr. Powell also thinks, or at least claims, that the Fed can solve this problem with monetary levers when the real fix will be when the vaccine rollout facilitates a rapid reopening of the economy. Mr. Powell thinks the economy could grow 6% or so this year. But he never explains why that growth wouldn’t naturally boost employment absent the Fed’s interventions, or how stoking demand via successive government spending bills amid supply constraints won’t trigger inflation.

Mr. Powell also used the jobs issue to justify continued large-scale Fed purchases of mortgage-backed securities ($40 billion a month) and Treasury bonds ($80 billion). Treasury Secretary

Janet Yellen

will be grateful. The Congressional Budget Office estimates the federal budget deficit will be $2.4 trillion this year under current law, and the Biden Administration’s $1.9 trillion spending bill would push it past $4 trillion.

The argument for this blowout is that the amount of government spending and debt doesn’t matter when interest rates are at historic lows. But the risk is that rising rates or inflation will blow up this sunshine scenario, and Mr. Powell essentially said that he’ll buy Treasurys for as long as the politicians keep issuing them and in whatever quantities are needed to keep rates low.

This means the main justification for Treasury purchases isn’t to help households or the economy. The purpose increasingly is to finance the debt required by record federal spending, lest interest rates spike if demand for Treasury debt falls around the world. But Mr. Powell can’t say this candidly without embarrassing Congress and calling into question Fed independence.

If this sounds like modern monetary theory (MMT), well, that’s because it is. And thank heavens all of this debt monetization absolutely will not, under any circumstances, cause inflation or financial instability. Equity markets rose Wednesday on Mr. Powell’s nothing-to-worry-about assurances.

Journal Editorial Report: Paul Gigot interviews economist Douglas Holtz-Eakin. Image: Stefani Reynolds-Pool/Getty Images

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Appeared in the February 25, 2021, print edition.

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