'That Means In 25 Yrs We're Happy We've Lost 50% Of Our Purchasing Power': Hill Rips Inflation Plan

3 hours ago

During a House Financial Services Committee hearing, Rep. French Hill (R-AR) questioned witnesses about the Federal Reserve's actions to combat inflation.

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Transcript

00:00The gentleman yields back, the gentleman from Arkansas, Mr. Hill, the full chairman of the

00:04committee is recognized for five minutes.

00:06Thanks, Chairman.

00:07Appreciate it.

00:08Appreciate the panel.

00:09Great testimony.

00:10We're grateful for that.

00:11Dr. Michel, you said that you think the Fed's trying to do too many things.

00:15I heard that, and Mr. Wang talked about that as well.

00:23In Dr. Cohn, in your testimony, you say maximum employment is given by influences outside

00:31the control of the Fed, particularly the structure of the labor market.

00:36And then you say inflation is also subject to outside influences, but over time the Fed

00:41can control inflation.

00:42So would you say that of the so-called dual mandate, that price stability is certainly

00:49something the Fed has more direct influence over rather than, quote-unquote, full employment,

00:55which is severely impacted by regulatory policy, tax policy, spending policy, budget deficits?

01:01Is that true?

01:02Yes.

01:03I think economists would agree that over time, inflation is, as Milton Friedman put it everywhere

01:09and anywhere, a monetary phenomenon.

01:12That doesn't mean that the money supply directly feeds inflation, but the Federal Reserve can.

01:17The Federal Reserve now can control inflation over longer periods of time.

01:22In terms of maximum employment, basically the level of maximum employment, the lowest

01:29possible unemployment rate, is inferred from the behavior of other variables around it.

01:36So if you push the unemployment rate—

01:38But you're not arguing that you're a Phillips-curve guy, are you, Dr. Cohn?

01:42Yeah, I'm a Phillips-curve guy.

01:45All right.

01:46Well, we'll have another visit about that.

01:48I think the last 50 years have discredited that economic thought.

01:53But you've been such an important voice in the Fed, we're glad to have you back before

01:56the committee.

01:57I heard you answer the question about the Fed's framework issue.

02:02What do you think would be the single most important thing that would go into that assessment

02:10about whether they missed it this time?

02:12I mean, I would argue—I don't support saying 2 percent, either under former Chair Yellen,

02:19because that means in 25 years we're happy that we've lost 50 percent of our purchasing

02:23power.

02:24I mean, how can you argue for that as a public official?

02:27So what do you think, if you were sitting back in that meeting, what would be the most

02:31important point you'd make about having missed it in 2021?

02:35So I think a lot of what happened in 2021 was a bad forecast.

02:42And the Fed was not the only person making a forecast that inflation was going to come

02:48down over 2022.

02:50As these supply constraints, the supply chain stuff—remember the ships off of Long Beach

02:55and the chips and all that thing—came off, people returned to work, then prices would

03:02come back down again.

03:04And that took much longer.

03:06And in addition, there was way too much pressure in the labor market.

03:09So it wasn't only supply constraints, there were demand constraints.

03:13But I think the bad forecast was a major reason why the Fed took so long.

03:19I think another reason was the forward guidance they gave on interest rates.

03:25So married with that forecast, they said we're going to keep them at zero until we're back

03:29at full employment.

03:31So I think it all delayed it.

03:32Now, if the Fed had gone a few months earlier, would that have made a big difference?

03:37No, but it might have made a little difference.

03:39Yeah, I think, I mean, certainly if you look, listen to Dr. Summers and other very prominent

03:45former officials in the Obama administration, for example, going in Q4 of 2020 and starting

03:52the shrinking of the balance sheet and slightly raising rates would have been potentially

03:55better.

03:56But I think there you have bad monetary policy decisions, which we've talked about, but

04:01equally bad fiscal policy decisions, you know, by the incoming administration at the

04:05time of the Biden administration.

04:06I do think the Fed is to be-

04:08Let me reclaim my time.

04:09I want to switch subjects.

04:10Thank you for that.

04:11Please respond in writing if you want to talk some more about that.

04:16Let me talk about the Fed balance sheet.

04:18Dr. Mischel, you were talking about the Fed allocating credit as one of those things that

04:22you thought was beyond strictly scope on price stability.

04:28So do you think that that's the case in buying mortgage-backed securities?

04:33Oh, yeah, no doubt.

04:34I mean, you're-

04:35Should the Treasury, should Treasuries be the only open market asset for the Fed for

04:42the Open Market Committee?

04:43That would be my preference, yes.

04:46Short-term Treasuries only.

04:48And is there, what do you think, have you looked at the pernicious impact of, as was

04:54said in your testimony, too much gas on the fire for housing at the right of the time

04:59of the housing market was rebounding?

05:01Yeah, no, that never made any sense at all.

05:04Would you give us some more background on that in writing, please?

05:06And with that, I yield back, Mr. Chairman.

'That Means In 25 Yrs We're Happy We've Lost 50% Of Our Purchasing Power': Hill Rips Inflation Plan

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