Federal Reserve chairman Jerome Powell has finally called for deficit reduction, in a 60 Minutes interview.
“We mostly try very hard not to comment on fiscal policy and instruct Congress on how to do their job, when actually they have oversight over us,” he said.
“Mostly” is doing some work there, as Powell did call for fiscal support during the Covid pandemic, and he downplayed the possibility of the American Rescue Plan Act contributing to inflation. Until now, he has been quiet about the deficit, even though excessive government spending makes it more difficult for the Fed to fulfill its mandate for price stability.
As I noted in October, it is important for the Fed to stay independent from politics, and it would be out of place for the Fed to prescribe how the deficit should be reduced or how the government budget should be written. But there’s nothing partisan or improper in simply noting that the deficit is way too high right now and it should be reduced. An economy with unemployment below 4 percent should not be running a $2 trillion deficit.
Powell proceeded to give that nonpartisan, just-the-facts view about the deficit. “In the long run, the U.S. is on an unsustainable fiscal path, the U.S. federal government is on an unsustainable fiscal path, and that just means that the debt is growing faster than the economy,” he said.
When asked whether it worries him, Powell said, “Over the long run, of course it does. Effectively, we’re borrowing from future generations. It’s time for us to get back to putting a priority on fiscal sustainability, and sooner is better than later.”
Sooner is better than later, now is better than sooner, and a while ago was better than now, but it’s good that Powell has finally acknowledged the problem.
Elsewhere in the interview, Powell reiterated the Fed’s commitment to 2 percent inflation in the long run, which has been consistent and welcome, ignoring some calls for a higher inflation target. As one might expect, he downplayed the Fed’s role in contributing to inflation in the first place with a rapid expansion of the money supply that continued well after the pandemic recession was over.
On the failure of Silicon Valley Bank, when asked whether the Fed missed it, he said, “Yes, we did, and we forthrightly saw that we needed to do better.” The Fed did indeed miss it, and it was good to see Powell admit the error, as a Fed report has already done.
Powell’s overall view of the strengths of the American economy are spot-on and worth noting in full:
One is I think we need to just remember that we have this dynamic, innovative, flexible, adaptable economy, more so than other countries. And this is the big reason why our economy has come through so well. The other thing I’ll point to for the United States is, really since World War II, the United States has been the indispensable nation, supporting and defending democracy — security arrangements, economic arrangements, we’ve been the leading voice on that. And it is clear that the world wants that. And I would want the United States to know, people in the United States to know, that this has benefitted our country enormously. It benefits our economy so much to have this role, and I just hope we, I hope that continues.
All of that was true before Biden, before Trump, before Obama, before any politician in recent memory that you can blame or credit. It is still true now. And, as Powell said, we must take care that it remains true for the future. One of the top ways to do that right now is by getting government spending under control.