As a Fed governor, Powell proved willing to strike a fairly independent course when discussing regulatory policy, but when it came to monetary policy, he largely stuck to the script of the previous Fed Chair, Janet Yellen.
As such, despite the reasonable assumption that Powell represents continuity, there are still a number of areas where greater clarity from the Fed Chair can improve the public’s understanding of how he views the workings of the US economy and the likely evolution of monetary Policy.
Questions for the new US Fed Chair
The timing of the testimony is particularly fortunate, given the uncertainty over how a new Fed Chair will incorporate significant fiscal stimulus into his policy outlook when the economy is already at full employment and operating at an above-trend rate of GDP growth.
In the spirit of eliciting clarity on these and other key issues, this brief note suggests several questions that members of Congress should consider posing.
Source: Federal Reserve, Official portrait of Governor Jerome H. Powell, as of 05/06/2012
Improving transparency and communications
In your prepared remarks at your swearing-in ceremony, you noted that the Fed will ‘continue to pursue ways to improve transparency both in monetary policy and in regulation.’
Are there specific improvements on the policy front that you have in mind? For example, are you in favour of publishing a policy rule that would capture the reaction function of the Federal Open Market Committee (FOMC) and serve as a basis for discussing recent and anticipated policy adjustments?
Do you believe that publishing a rule of the FOMC’s own choosing would improve or hinder the Fed’s communications with the public and its independence from politics?
In addition, are you contemplating any changes to the frequency of post-meeting press briefings? Finally, do you see other ways to enhance communications on the economic and policy outlook, for example by introducing improvements to the quarterly Summary of Economic Projections?
Midpoint of target range for the federal funds rate
Source: FOMC projections materials, as of December 2017
Fighting the next recession
Your views on central bank asset purchases appear to have evolved over time. The transcript of the September 2012 FOMC meeting indicates that you supported the third round of asset purchases but with ‘a certain lack of enthusiasm.’ In a mid-2013 speech you described the evidence on the effectiveness of asset purchases as ‘mixed, but positive on balance.’ However, by 2015, you commented: “the evidence so far is clear that the benefits of these policies have been substantial, and that the risks have not materialised.”
In the next recession, even if a mild one, the FOMC may again find it necessary to provide additional monetary stimulus even after cutting the policy rate to close to zero.
In such a scenario, would you be comfortable resorting to asset purchases, or do you continue to have reservations about their effectiveness? Would your comfort level change if this scenario were to play out relatively soon, that is, well before the Fed had completed running off assets purchased during prior rounds of quantitative easing?
In addition, are you equally comfortable buying both Treasuries and agency mortgage-back securities (MBS), or are there scenarios where purchasing one over the other would be preferable?
Finally, if you see constraints on using asset purchases in the next recession, are there other tools you would use to compensate, such as cutting the target for the federal funds rate to below zero or using forward guidance?
Changing the policy framework
Related to the above issue, over the past year or so a number of current and former Fed officials have urged consideration of possible changes to the FOMC’s longer-term policy framework. These changes would be aimed at creating additional space to ease financial conditions in a future recession, when the policy rate is very likely to be back at the zero lower bound and the FOMC may have to face serious constraints on cutting real interest rates. Proposals for a framework change include a higher inflation objective or a move to price level or nominal GDP targeting.
Is studying the adequacy of the framework and examining possible alternatives a priority for you, and if so, do you anticipate that the FOMC will formally take up the issue this year?
At this point, how do you view the strengths and weaknesses of some of the alternative frameworks that have been suggested?
Balance sheet policy
The normalisation of the Fed’s balance sheet has been described as being on ‘auto-pilot’. For example, the wording of the June 2016 addendum to the policy normalisation plan suggests that run-off will continue until the FOMC finds itself significantly cutting the policy rate in a recessionary environment.
Can you envision any circumstances under which balance sheet run-off could halt even as the expansion continues, for example, if downside risks to the outlook increased?
As a specific example, would you be comfortable continuing with balance sheet run-off even if financial conditions tighten significantly due to a substantial spike in long-term interest rates, perhaps tied to increased issuance to fund tax cuts and new spending?