The takeaway …
Two times a year, the Chairman of the Board of Governors of the Federal Reserve System heads up to Capitol Hill to deliver a semi-annual report on the state of U.S. monetary policy to both chambers of Congress. You can almost guarantee that at least two representatives or two senators will ask Board chairman Jerome Powell to give an opinion on the appropriateness of current or proposed fiscal policy.
And it is guaranteed that Chairman Powell will follow the lead of past Board chairmen and decline to opine on the appropriateness of fiscal policy.
A textbook definition of fiscal policy provided by financial education and media website Investopedia states the following:
“Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions. These include aggregate demand for goods and services, employment, inflation, and economic growth.”
Chairman Powell will remind Congress during these moments that his Board is responsible for monetary policy. Again, the textbook definition:
“Monetary policy is a set of tools used by a nation’s central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements.”
Both action plans aim to promote growth with monetary policy manipulating money supply via interest rates and fiscal policy using tax and spending programs to manipulate aggregate demand.
As the fiscal agent for the United States Department of the Treasury and other US government agencies, as well as a purchaser and reseller (underwriter) of US Treasuries, I would think that the Chairman would have an opinion on how the pouring of U.S. IOUs into the bond market would impact the supply of, and the interest rates paid on this debt. For example, as supply of new Treasuries increases the number of debt instruments in the bond market, there will be downward pressure on bond prices while yields increase. I would think that the Chairman would at least describe any conflict Congress’ fiscal policy would pose for the Board’s monetary policy.
In my opinion, Chairman Powell is not prohibited by law to give an opinion. The law opens the door to an opinion from the Board on fiscal policy. 15 USC 1022e(b) calls for a coordination of fiscal or monetary policy when battling inflation. Specifically:
“The Congress finds that sole dependence upon fiscal or monetary policies or both to combat inflation can exacerbate both inflation and unemployment. The Congress finds that the coordinated use of fiscal and monetary policies in conjunction with specific targeted policies are necessary to combat inflation.”
“The President shall initiate specific policies to reduce the rate of inflation, including recommendations to the Congress where necessary, and include recommendations within the Economic Report and the President’s budget to the extent practicable.”
And in 15 USC 3101(c), inspired by poor economic conditions of the 1970s, Congress expressed its intent for a coordinated effort by the Congress, the President, and the Board of Governors of the Federal Reserve System when battling high unemployment and inflation:
“(c) The Congress further finds that an effective policy to promote full employment and production, increased real income, balanced growth, a balanced Federal budget, adequate productivity growth, proper attention to national priorities, achievement of an improved trade balance, and reasonable price stability should (1) be based on the development of explicit economic goals and policies involving the President, the Congress, and the Board of Governors of the Federal Reserve System, with maximum reliance on the resources and ingenuity of the private sector of the economy, (2) include programs specifically designed to reduce high unemployment due to recessions, and to reduce structural unemployment within regional areas and among particular labor force groups, and (3) give proper attention to the role of increased exports and improvement in the international competitiveness of agriculture, business, and industry in providing productive employment opportunities and achieving an improved trade balance.”
This requirement for coordination between the Executive, the Legislative, and their agent, the Board of Governors of the Federal Reserve System is going to require a lot of opining from the Board. I just can’t imagine Chairman Powell or his designee sitting with representatives of the Treasury and the Congress and merely shaking his head. There is an opinion somewhere in those coordination meetings or telephone discussions.
To be fair to Congress (I am feeling charitable. It’s a nice writing day), the monetary policy reports that the Board provides Congress do not provide any mental impressions regarding how the Board feels about fiscal policy. For example, my review of the February 2022 and June 2023 monetary policy reports to Congress identified analysis of the quantitative impacts on consumer spending, household incomes, and federal budget deficits resulting from fiscal stimulus during the Covid-19 pandemic. The Board, however, did not opine in the reports on the appropriateness or effectiveness of fiscal policy.
Minutes taken at Federal Open Market Committee meetings, where the Federal Reserve decides the target range for the overnight federal funds rate, is sparse on references to fiscal policy. My review of the transcripts from the March 2022, May 2023, and September 2023 meetings found a total of four references to fiscal policy with the focus on quantitative impact on the economy. No references to effectiveness or appropriateness.
A congressman or senator reviewing these reports may draw the same conclusion that the Fed is not looking at fiscal policy appropriateness. I have yet to hear a congressman or senator inquire about whether the Fed makes its opinions known during its coordinating efforts with Congress and the President.
Should the Chairman feel compelled to share his opinion on fiscal policy? While no legal standard either compels him to speak or requires he maintain a firewall, I think strategically it is the appropriate position to take. Speaking on whether congressional spending is appropriate only increases the potential for the central bank to be a political punching bag for the President, Congress, and the electorate.
Let Congress and the President take the brunt of the criticism on too much spending. To maintain political independence requires non-participation in setting budget priorities for the country. In the meantime, Congress should stick to reading the Fed’s monetary policy reports and stop taking short cuts when it comes to understanding monetary policy.
Alton Drew
11 November 2023
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