Breitbart Business Digest: A More Hawkish Powell Expected to Defend Higher Rates on Capitol Hill

Mr. Powell Goes to Capitol Hill to Flash His Hawk Feathers

Jerome Powell is going to Capitol Hill this week for two days of testimony to lawmakers. He is expected to take a hawkish tone and defend the view that interest rates will likely go higher than anticipated just a few weeks ago if economic data continues to come in hotter than expected.

It’s widely expected that Powell will take the most heat from the leftmost Democrats. Many have already expressed concerns that the Fed has been too single-minded in pursuit of taking inflation and is unnecessarily risking a recession by continuing to hike interest rates. Powell has repeated said, however, that in the longer run maximum employment depends on price stability, which he says justifies “softening” the labor market to bring down inflation.

In his aborted speech last week, Fed Governor Christopher Waller was even more explicit:

One implication of the strong labor market is that the [Federal Open Market Committee’s] maximum employment goal has been achieved and monetary policy can be utterly focused on fighting inflation. Any fear that we might face two-sided risk in achieving our dual mandate was blown away by the January employment numbers.

One test of Powell’s hawkishness will be whether he is willing to go that far.

How We Got Here: The Secret History of Inflation Targeting

The Federal Reserve chairman is required by law to deliver a “monetary policy report to the Congress” twice a year. Powell will testify before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. Although these are typically called the Humphrey-Hawkins hearings, the legal requirement actually preceded the Humphrey-Hawkings Full Employment and Balanced Growth Act of 1978 by almost a year.

Sen. Hubert Humphrey (D-MN) had come to believe that the requirement of the 1946 act for the government to promote maximum employment were being “conveniently ignored.” Humphrey sought legislation that would have included a jobs guarantee and much greater executive oversight of monetary policy. If employment fell short, the government would provide enough jobs to achieve the target. The president would submit his preferred monetary policy to the Fed, which would have 15 days to explain any proposed deviation.

Those ideas did not make it into law—although they live on in spirit in the form of Modern Monetary Theory, or MMT.  The proponents of MMT tend to advocate for a much closer cooperation between monetary and fiscal authorities, often treating them as something close to a unified entity for the purposes of analyzing the operations of the federal government. And, of course, a jobs guarantee is central to MMT.

In 1977, however, the Federal Reserve Reform Act required the Fed to pursue three goals: stable prices, maximum employment, and moderate long-term interest rates. Strangely enough, the last of these goals is now rarely mentioned, and the Fed is often said to have a dual mandate of price stability and maximum employment. It’s hard not to wonder if a bit more attention to the “moderate long-term interest rates” goal might have persuaded the Fed to abandon the zero interest rate policy that helped bring about the current inflation mess.

The 1977 Act also required the Board of Governors of the Fed to “consult” with Congress as semiannual hearings before the Senate and House panels. The subject of those hearings are supposed to be “the objectives and plans with respect to the ranges of growth or diminution of monetary and credit aggregates for the upcoming 12 months, taking account of past and prospective developments in production, employment, and prices.”

The Federal Reserve, however, no longer targets ranges of growth of diminution of monetary and credit aggregates. If, say, Sen. Rand Paul (R-KY) were to ask Powell on Tuesday about the Fed’s plans with respect to the growth or diminution of monetary and credit aggregates, the answer would probably be something like: “We expect monetary and credit aggregates to respond through market processes in ways consistent with our interest rate policy.” In other words, he would have no real answer at all.

Instead, over the two or three decades that followed the passage of the Act, the Fed moved to target the inflation rate. It was not until 2010, however, that the Fed explicitly said it was targeting inflation. It took another two years for the Fed to clearly state that it was targeting two percent inflation “as measured by the annual change in the price index for personal consumption expenditures.”

The War Machine’s Role in the U.S. Economy Is Growing

The data on factory orders released by the U.S. Census Bureau on Monday provided a glimpse at how big of a role the war in Ukraine is playing in the U.S. economy. By comparing this January’s defense orders with those of last January—the final month before the Russian invasion—we can see the growth of defense spending in U.S. manufacturing.

New orders for defense capital goods were 25.4 percent higher in January of 2023 than they were in January of 2022. This increased their share of all orders from 2.05 percent of manufactured goods to 2.47 percent. Orders for defense aircraft and parts are up 85 percent, taking them from 0.6 percent of factory orders to 1.1 percent of factory orders—nearly doubling. Spending on defense communications equipment is up 8.8 percent, which seems curiously modest when compared with the other categories.