Fed Chair Jerome Powell: We Need To See 'More Good Inflation Data' Before Long-Term Rate Cuts

2 months ago

During a Senate Banking Committee hearing prior to the Congressional recess, Sen. Bill Hagerty (R-TN) spoke about inflation and interest rates.

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Transcript

00:00Thank you, Mr. Chairman.

00:04Chairman Powell, welcome.

00:06Chairman, last week in Portugal you said that you wanted to be, quote,

00:10more confident that inflation is moving sustainably

00:12down before you begin to cut rates.

00:15You also said in your testimony that you need greater confidence

00:18and more good data before lowering rates.

00:20Can you give us any color as to what it is you're looking for in the data

00:24and how long it might take us to get there?

00:27We need just to see more good inflation data.

00:29That's all.

00:30We, you know, we had seven months of good inflation data at the end of last year.

00:33Then we had a quarter, really a month or so, where inflation went up.

00:37And now it may be we had one really good inflation reading and one pretty good one.

00:42We just need to see more so that confidence rises.

00:45I'm not going to-

00:46Are we weeks away, months away?

00:49Yeah, I mean, I'm going to try to avoid sending any really specific signals

00:53about time today because it's going to depend on the data.

00:56It also matters what's going on in the labor market, though.

00:58You know, we've also said that if the labor market weakens unexpectedly,

01:01that could be a case for loosening policy as well.

01:05Really, we're weighing both those factors.

01:07Here's one of my concerns.

01:08I'm sure you probably share it, but we're coming off of a 40-year high in inflation.

01:13We've seen the rate of inflation coming down, but we haven't gotten to the 2 percent target.

01:18And my concern, for lack of a better term, is whether or not this might be transitory

01:21in terms of the data that we're seeing right now.

01:24That's exactly why we're approaching this question carefully.

01:28I thought that might be your answer.

01:29Thank you, Mr. Chairman.

01:30Can we shift now to the issuance of Treasury debt?

01:33You know, the Fed is the largest holder of Treasury debt.

01:38In February, you and I talked about the pressures that our fiscal deficit is exerting

01:41on interest rates, which by extension makes your job more difficult.

01:45I'd like to talk this time about how Treasury issuance is impacting our economy

01:49and our monetary policy.

01:51First, just a basic question.

01:52If Treasury issuance were to shift drastically, either to the long end or the short end

01:57of the curve, would that affect interest rates?

01:59Or maybe more simply, do changes in supply

02:01across maturities impact interest rates in the yield curve?

02:06I mean, I think in theory they can.

02:08No, I agree.

02:10As you know, the Treasury Borrowing Advisory Committee recommends that T-bills comprise

02:15between 15 and 20 percent of total U.S. debt.

02:18Right now, the Treasury is issuing T-bills significantly above that recommended range.

02:23Some people, including myself, believe that this is being done

02:26to artificially stimulate markets in the run-up to the election.

02:29And it's shocking how little attention this is getting.

02:32Any manipulation of debt management of this nature stimulates inflationary pressures

02:37and increases taxpayer burden because it's higher cost to issue these bills.

02:42So given that Treasury is issuing an excess of short-term debt,

02:45which pulls down longer-term rates, isn't it working at cross-purposes

02:49with your monetary policy goals of taming inflation?

02:52So we take Treasury's debt management decisions.

02:56We don't comment on them.

02:57We just do our jobs.

02:58I'm not asking for a comment on their decision, but just as a simple mathematical truth,

03:03if they're pulling down demand on the long end of the curve, doesn't that work?

03:07I wouldn't say that that has important inflation implications, no.

03:11You know, it just feels to me the same way

03:13that the Biden administration drains the strategic petroleum reserve.

03:16That undermines our ability to respond to energy shocks.

03:20When the Treasury manages its debt in this manner, it constrains our ability

03:23to respond to future economic shocks, and that opens our nation up to very real risk.

03:29Whether it be amplifying the effects of the Fed's balance sheet reduction,

03:33flooding the supply of one of the most important short-term debt instruments,

03:36the risks seem to me to be mounting for Treasury market disruption.

03:40I'd like to know what your thoughts are, Mr. Chairman, about how the Fed will navigate this

03:43and whether you've had discussions with the Treasury

03:46about this growing dangerous dynamic.

03:49No, we don't have a seat at the table on Treasury debt management.

03:52Treasury makes those decisions, and they don't have a seat at our table on monetary policy.

03:56I just think the risk is very obvious here, though,

03:59where we're headed with this type of portfolio.

04:01Honestly, it's just, it's completely out of bounds for me to comment

04:05on Treasury debt management in any way.

04:07I think you've been dealt a very difficult hand here, Mr. Chair.

04:10The Biden administration's policy is aimed to gin up the economy ahead of the election.

04:14These efforts directly undermine your policy goals at the Fed.

04:17That includes excessive issuance of short-term debt, think about it,

04:21Freddie Mac's backstop of second mortgages, unlawful student debt loan cancellations,

04:26the draining of the Strategic Petroleum Reserve to suppress fuel prices,

04:30and President Biden's own jawboning of the FOMC to lower rates.

04:34As you know, the Federal Reserve was structured to shield monetary policy

04:37from political influence, and that independence has given the Fed unique credibility

04:42in executing its mission.

04:43If the FOMC were influenced in any way by political calculation rather than economic data,

04:47it would severely damage the Fed's credibility as an independent institution,

04:51it would increase uncertainty in our markets,

04:53and it would jeopardize the dollar's status as the global reserve currency.

04:57Thank you, Mr. Chair.

04:58Senator Warren of Massachusetts.

Fed Chair Jerome Powell: We Need To See 'More Good Inflation Data' Before Long-Term Rate Cuts

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