Saturday, September 5, 2020

Federal Reserve Chairman Jay Powell's Odd Thinking About the Role of Price Inflation and Monetary Policy

Jay Powell

Ountògi ba mwen son mwen e

Tanbouyè ba mwen son mwen e

Ountògi ba mwen son mwen

Translation: Sacred drummer, give me my tune, oh

Drummer, give me my tune

Sacred drummer, give me my tune, oh

Federal Reserve Board Chairman Jay Powell was interviewed by NPR on Friday.

The interview was noteworthy in that Powell provided a clear explanation of his views on price inflation.

He couldn't have made it clearer that the Federal Reserve wants more price inflation:
So we really want some inflation. We want inflation to be around 2%. And that's where that's sort of the global standard these days is 2% inflation. We don't want inflation to slide down closer to zero, which frankly is happening many places in the world. And it's not a good feature of an economy when that happens...
But just before this, during the interview he said:
So, we all know that high inflation can be a problem. And I'm old enough to remember when it was a serious problem in the 1970s. And [former Federal Reserve] Chairman [Paul] Volcker at the Fed and his colleagues managed to get it under that world of 40 and 50 years ago, high inflation was the problem that we all talked about. And the difficulty in solving it, and would we ever get it under control? And again, the people who bore those burdens were those least able to bear them, as well. 
So he knows price inflation can be a burden but he wants more.

What gives?

Here is his take on why he wants higher price inflation:
[P]ersistently low inflation can be a problem, too. And this is less obvious and intuitive. And the reason is really this: When inflation is very, very low, it means lower interest rates. For example, in every interest rate is built in, whether we know it or not, an expectation of what inflation will be. And if people expect inflation to be very low, then interest rates will keep going down. Again, we've seen this around the world, lower and lower interest rates, lower and lower inflation. When interest rates get very low, the Fed will have less room to cut interest rates to support the economy. That means that unemployment will be higher, more of the time.

Got that?

Lower borrowing costs for you and businesses are seen as a problem for the Fed by Powell.


Because if interest rates are too low, in his view, the Fed might not be able to lower them even more and he wants to be able to have that ability.

This is what Paul Volcker said about the idea:
I puzzle at the rationale. A 2 percent target, or limit, was not in my textbook years ago. I know of no theoretical justification.
The idea seems to be Keynesian monetary policy thinking on Haitian Voodoo steroids.

Keynes held the view that at times aggregate demand needs to be managed via fiscal policy. (I discuss in my forthcoming book, "Problems With Modern Monetary Theory: A Comment on Stephanie Kelton’s 'The Deficit Myth,'” why this is positively nutty thinking.)

Monetary Keynesians then went one better than Keynes and promoted the idea that not only fiscal policy should be used to manage aggregate demand but that it should also be done by money printing as well.

Such money printing is generally done by the Fed manipulating interest rates by buying and selling of Treasury securities and other assets.

Keynes talked about using fiscal policy to fix the non-existent "problem" of weak aggregate demand.

It then jumped to include money pumping to fix the non-existent "problem" of weak aggregate demand.

Money pumping is mostly done by buying Treasury securities but as Murray Rothbard correctly pointed out in The Mystery of Banking:
From the point of view of the money supply it doesn't make any difference what asset the Fed buys; the only thing that matters is the Fed's writing of a check... And, indeed under the monetary Control Act of 1980 the Fed now has unlimited power to buy any asset it wishes up to any amount -- whether it be corporate stocks, bonds, or foreign currency. But until now virtually the only asset the Fed has systematically bought and sold has been US government securities.
Since Rothbard's book was first published in 1983, the Fed has indeed bought other assets. Notably, during the Great Recession, the Fed bought special vehicle instruments containing securitized mortgages, and now they are buying corporate bonds and corporate bond ETFs.

So then the question becomes, why does the Fed need price inflation? If it wants to boost aggregate demand by pumping money into the system, it can buy any assets it wants regardless of what the price inflation rate is and where interest rates are.

In short, current Fed thinking is shady cosmic, having nothing to do with the reality of this universe. This is all just a Jay Powell and Federal Reserve price inflation Ountò.

As Dr. Lois Wilcken has written, a vital spirit of Haitian Voodoo is "Ountò [which] comes first, because nothing can draw breath without this cosmic heartbeat."



  1. That was revelatory. I never understood the Fed's theory. Now I know: we want inflation because we want inflation, and that allows us to cut interest rates to stimulate price inflation. Brilliant!

  2. This mindless circular talk is nothing new. 50 years ago in freshman economics the professor assured us that government debt was not a problem because "we owed it to ourselves." This something for nothing scam has always been senseless and at the time I chalked it up to a witless professor. I under-estimated how widespread and damaging this notion would be. Inflation to "repay" this debt is the biggest theft ever committed.

  3. As I see it, the US govt has far too much debt to every legitimately repay it. So it either has to sell govt assets, default on its debt obligations, or try and inflate away the debt. Politically, the first 2 options are not very palatable. But by inflating away the govt debt, most people won't notice (or if they do notice subsequent rising prices, they'll also think that their retirement savings is going up ... so they'll tolerate it).

    I guess what I'm trying to say is that while the inflation tax hurts us all ... for politicians its a good plan for slowing reducing its debt (that is, if it could ever slow down its deficits).

    I could be wrong here ... but that's how I see it.

    And, of course, govt officials can't say this stuff. Instead they need to try and convince us all that a low lever of inflation (they way they measure it) is good for us.