The tl;dr on Powell This Morning

The CATO Institute is holding its 40th annual monetary conference today. I just watched the opening session, which featured a moderated Q&A with Fed Chair Jerome Powell. It’s an all-day conference, ending at 3:40 pm (ET), so you can watch the remainder if you hop online now. And I suspect videos of each panel will be available for those who want to go back and watch at a later date.

I stopped watching after the session with Powell. Like this former Fed economist, I found the whole exchange pretty odd.

Indeed, as Ann Saphir (who covers the Fed for Reuters) observed, Powell wasn’t even asked about the kind of stuff that is front of mind for most people who are thinking about monetary policy right now.

I went to the trouble of taking notes, thinking we might hear something important or at least useful. We didn’t. But since I spent part of my morning doing it, I thought I’d paraphrase and share the exchange.

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CATO: Some people say we have high inflation because of the pandemic and related supply-chain problems, but it was really excessive money-printing and too much fiscal stimulus, wasn’t it?

POWELL: No. The policy response supported strong demand, but you wouldn’t have seen anything like the inflation we’ve seen without the backdrop of the pandemic and the supply-side constraints. It’s not easy to disentangle the demand versus supply drivers, but it’s not as you suggest.

CATO: Volcker was the man. Do you have what it takes?

POWELL: Yes, he was. And, yes, I do.

CATO: The Federal Reserve’s flexible average inflation targeting (FAIT) strategy was a mistake. Isn’t it time to modify or abandon it?

POWELL: It is a fait accompli.

CATO: It’s still pretty easy for people to find a job, and wages keep rising. Doesn’t that make your job harder?

POWELL: It does. We are trying to bring the labor market into “better balance.” The recent increase in labor force participation was welcome, and it’s important for society that we have a strong labor market. But we think it’s too strong at the moment. We’re trying to change that.

CATO: Why did everyone forget their Milton Friedman?

POWELL: Get with the times. Changes in monetary aggregates haven’t been a good predictor of inflation for decades. If you’re obsessed with monetary aggregates, you’re missing the plot. We don’t pay attention to them and certainly don’t allow them to play any role in our formulation of monetary policy.

CATO: We’re not fans of fiat money or discretionary monetary policy. We like rules. We like nominal GDP targeting.

POWELL: Hard pass. While Taylor rules have become part of the fabric of monetary policy analysis, no central bank—and certainly not the Federal Reserve—has ever tied its hands to such a rule. We have looked at NGDP targeting, and we’ve concluded that it’s “not the right way to go.” My objections are well-known to advocates of NGDP targeting, and repeating them won’t persuade anyone at CATO.

CATO: You should ditch the full-employment side of the dual mandate.

POWELL: No, we shouldn’t. It “has served the public well and is generally workable.”

CATO: Some people would expand the Fed’s mandate to include things like racial equity or greater emphasis on financial stability. We don’t like that.

POWELL: Me neither. I’m content with the dual mandate and wouldn’t want it narrowed or broadened.

CATO: You’re sitting on a big balance sheet. What’s the plan to shrink it, and can we go back to the “scarce reserve regime” we had before all of these discretionary large-scale asset purchases (LSAPS) started?

POWELL: We’re shrinking the balance sheet, but the world is an uncertain place. Stuff happens, and we’re not closing any doors. When the need arises—and it surely will in due time—we reserve the right to roll out LSAPs again. There is no turning back. We live under an “ample reserves regime” now. Get used to it.

CATO: The Fed has been thinking about possibly introducing a central bank digital currency (CBDC). We have a variety of concerns surrounding privacy and financial repression. Assuage my fears.

POWELL: No decision has been made. We think we would need a specific authorizing law from Congress and the executive branch. Any CBDC should be privacy protecting. That is “extremely important” to us. We would not do it like China. We’re in no hurry. We continue to study the issue.

CATO: We like cryptocurrencies. We want to see private market innovation as alternatives to fiat. We worry about regulators.

POWELL: I have family members who love crypto, but the unbacked stuff—e.g. Bitcoin—doesn’t appear to work as “money.” If people are going to think something is “money” it needs to have the qualities of money. Bitcoin is not a great store of value, for example. But stable coins are potentially a different animal. I think they can be a legitimate part of the financial system, and I wouldn’t want to stifle innovations in that regard. But you need appropriate regulation.

CATO: Ugh, regulation.

POWELL: I’m in favor of innovation but with appropriate regulation.

CATO: Let’s shift gears. Say something about our nation’s unsustainable fiscal path. Do you share my concerns about a “day of reckoning” and the harm we’re doing to future generations?

POWELL: Fiscal policy is for Congress and the administration. The Fed tries to avoid weighing in on those issues. But let me weigh in by repeating the boilerplate that nearly every one of my predecessors has offered when faced with this question: Our federal fiscal policy isn’t on a sustainable path, and we’ll need to get back to a sustainable path sooner or later and sooner is better than later.

CATO: What are some key lessons you’ve learned or advice you’d give to young monetarists?

POWELL: First, embrace the task at hand. It’s our job to get inflation down. Second, failure is not an option. Third, be prepared to change your views in light of the evidence. And, finally, consider working at the Fed. It’s a very special place.