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Apr. 24, 2021, 6:42 p.m. ET
Jerome Powell, Chairman of the Federal Reserve, on March 3, 2020.
Eric Baradat / Agence France-Presse / Getty Images
Inflation? What inflation? That was the main message from Federal Reserve Chairman Jerome Powell to Congress and the markets in two days of testimony this week with an ancillary to modern monetary theory.
Mr Powell told everyone not to worry about rising interest rates or rising asset prices because he and the Fed are not worried. “The economy is far from our employment and inflation targets and it will likely be some time before significant further progress is made,” he said early and often.
Instead, he focuses the Fed on the full employment half of its mandate. Around 10 million jobs have not returned after last year’s Covid-19 lockdowns, and Mr Powell and other Fed board members are not wrong to claim that the data is hiding many other people who have left the job market.
However, Mr Powell also believes, or at least claims, that the Fed can leverage this problem if the real solution is for the introduction of the vaccine to allow the economy to reopen quickly. Mr Powell believes the economy could grow about 6% this year. But he never explains why this growth would not naturally boost employment without Fed intervention, or how demand through successive government spending with supply constraints would not trigger inflation.
Mr Powell also used the jobs problem to justify continued large-scale purchases by the Fed of mortgage-backed securities ($ 40 billion per month) and government bonds ($ 80 billion). Treasury Secretary Janet Yellen will be grateful. The Congressional Budget Office estimates that the federal budget deficit this year under current law will be $ 2.4 trillion, and the Biden administration’s spending bill of $ 1.9 trillion would make it over $ 4 trillion postpone.
The argument for this outbreak is that government spending and debt levels don’t matter when interest rates are at historic lows. The risk, however, is rising interest rates or inflation to blow up this sunshine scenario, and Mr Powell was essentially saying that he will buy treasuries as long as politicians keep spending them and in whatever amounts to keep interest rates low .
This means that the main rationale for buying government bonds is not to help households or the economy. Increasingly, the purpose is to fund the debt required for record federal spending so that interest rates don’t rise when demand for government bonds falls globally. But Mr. Powell cannot say this openly without embarrassing Congress and questioning the Fed’s independence.
If this sounds like modern monetary theory (MMT), it’s because it is. And thankfully, all this monetization of debt is not going to cause inflation or financial instability under any circumstances. Stock markets rose Wednesday on the back of unconcerned assurances from Mr. Powell.
Journal Editorial Report: Paul Gigot interviews the economist Douglas Holtz-Eakin. Image: Stefani Reynolds-Pool / Getty Images
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Published in the print edition on February 25, 2021.