Despite enacting a limited rate cut campaign to push our federal funds rate back to historic lows, Federal Reserve Chairman Jerome Powell expressed confidence in the economy to Congress’s Joint Economic Committee.
“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2% objective,” testified Powell.
But our historically low inflation rates mean that when the longest bull market in history ends in the event of an overdue recession, monetary policy has been rendered moot to revive the economy. So Powell sounded an important alarm ignored by both parties and both chambers of Congress.
“The federal budget is on an unsustainable path, with high and rising debt: Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn,” Powell testified. “In addition, I remain concerned that high and rising federal debt can, in the longer term, restrain private investment and, thereby, reduce productivity and overall economic growth. Putting the federal budget on a sustainable path would aid the long-term vigor of the U.S. economy and help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy if it weakens.”
A few points in Powell’s testimony here and otherwise are alarming. First, Powell already conceded in his testimony that dovish policy, both during the Obama and Trump administrations, “may limit” the Fed’s ability to ameliorate a concession. Here, he’s acknowledging that our annual trillion-dollar deficit also handcuffs vital fiscal policy required by even the most liberal of Keynesian economics. When pressed, Powell finally admitted that the Fed is “looking hard at ways to make sure that we can use our tools even after rates go to zero.”
Despite Powell explicitly stating that he opposes the president’s calls to plummet interest rates into the negatives, he’s still implicitly conceding that crashing our federal funds rate and disincentivizing investment is not a matter of if, but when.
Crucial to Powell’s call to cut spending is the fact that a recession would surely mean that the rate of our debt increase would outpace our economic growth even further. Without the monetary or fiscal policies to revive growth, we would indeed face a credit crunch that would crush private investment (including student, home, and business loans) and potentially render the government unable to issue payments as fundamental as those on bonds and healthcare spending.
Trump’s supporters may take offense at Powell’s insistence that his rate cut campaign is over, but his testimony’s most damning premonition is that of the looming national debt default.
