What We Would Ask Chair Powell at This Week's Congressional Hearings

Questions we would like to see answered at this week's Senate Banking Committee and House Financial Services Committee hearings.

Source.

Once again, it is that time of year when the Chair of the Federal Reserve heads to Capitol Hill to deliver the Federal Reserve’s semiannual monetary policy report to the Senate Banking Committee and House Financial Services Committee. And while my esteemed colleagues still have a perfect 0 for 0 record in winning elections and are not in a position to ask questions themselves, that doesn’t stop them from having plenty of burning questions they would like to see answered by the Fed Chair.

From Brian Knight:

There has been news coverage contemplating that the recent Supreme Court cases affecting regulators rulemaking (e.g., Corner Post, Looper Bright) will encourage agencies to rely more on regulation by enforcement rather than notice-and-comment rulemaking. 

1. Do you agree that people need to be put on notice of what the government expects of them before it penalizes them?

2. Will you commit to using notice-and-comment rulemaking whenever possible before bringing enforcement actions, unless the action in question unmistakably contravenes the statute?

From David Beckworth:

1. When will the Fed framework review commence?

2. What are you looking to address in the Fed framework?

   1. Are you happy with the performance of the Flexible Average Inflation Target (FAIT) or is that up for improvement in the framework?

   2. Have you considered adopting a NGDP target instead of FAIT?

   3. Are you going to discuss changes to the numerical value of the inflation target?

3. Are you open to also reviewing your monetary policy operating system? Currently, you have floor operating system which requires maintain a large central bank balance sheet. Other central banks like the ECB, BoE, RBA, and the Riksbank are gradually moving away from such floor systems. Any lessons for you and the Fed?

4. You had a section in the monetary policy report about Fed independence. It focuses more on outside pressures from Congress and the president. But what about developments inside the Fed that could impair independence? For example, is the Fed becoming more politicized by taking on climate change, inequality, and r issues? Do the opaque appointments of regional Fed presidents create impressions of politicization?

5. Would the appointment of an truly independent IG help preserve Fed independence?

6. Are you worried that the projected budget deficits will lead to fiscal dominance?

From Patrick Horan:

The Taylor rule is a guideline for adjusting the federal funds rate in response to the gap between the inflation gap (the difference between current inflation and the Fed’s 2% inflation target) and the output gap (the difference between actual real and potential real GDP). If inflation is above the target, or output is at risk of overheating, the rule suggests raising interest rates. Conversely, if inflation or output is below target, it recommends lowering interest rates.

Throughout 2021 and early 2022, the Fed kept the federal funds rate well below where the original Taylor rule (and popular modifications of the rule) indicated it should be. However, since early 2024, the federal funds rate has been above the rates prescribed by the most cited Taylor rules.

1. Does the Fed regret not more closely following Taylor rules in 2021 and 2022 when inflation surged? On the other hand, to what extent, is the Fed concerned that its current interest rate setting might be too tight given where it is relative to the common Taylor rules?

2. One challenge with targeting inflation is that it is difficult to distinguish between inflation coming from supply shocks, which the Fed should not respond to, and inflation coming from demand shocks, which the Fed should respond to. To get around this problem, some economists argue that the Fed should target nominal GDP rather than inflation. Nominal GDP would allow the price level to fluctuate in response to supply shocks, which the Fed is ill-equipped to deal with, but it would still anchor inflation in the medium and long run. What do you think about that proposal?

3. The Fed targets inflation as measured by the Personal Consumption Expenditure (PCE) Price Index. One criticism of PCE inflation is that measures home rents with a lag. Is this a problem? If so, should the Bureau of Economic Analysis, which publishes the PCE Price Index, revise how it measures home rents?