At hearings of the House Financial Services Committee yesterday, and of the Senate Banking Committee today, Fed Chair Jerome Powel was asked about why he and the Federal Reserve Board omitted the section on monetary policy rules in the just released February 2022 Monetary Policy Report.
In fact, the Fed’s Monetary Policy Report sent to Congress last Friday does not include the usual section on monetary policy rules. The Fed has included the section on policy rules in its Reports since July 2017, except for July 2020 during its initial response to Covid. Thus, this section on policy rules had regularly been in the Report 8 times, and goes back to Janet Yellen’s term as Fed Chair.
This omission is significant. It occurred at the same time that the Fed has gotten well behind the curve, and inflation has risen as a result. In fact, the removal happened as the discrepancy between standard policy rules, including the Taylor rule listed in the Monetary Policy Report, and actual Fed policy is as large as it has ever been. The removal thus diverted attention from this big discrepancy. So it is good that Jay Powell was asked about the removal.
By raising the issue, the Members of Congress brought attention to this omission, and Powell’s answers are very important. While he did not provide reasons for the omission, at the House he answered Representative Bill Huizenga, by pledging “We’ll have it in the next one” and he then followed up accordingly with Representative French Hill. In the Senate, Powell answered Senator Bill Hagerty, by pledging “We’ll bring them back for the July.”
The detailed discussion is well worth reading, as the Members of Congress and the Fed Chair raise many points. It is found in the transcript as drawn from the C-SPAN record. The House transcript is here https://www.c-span.org/video/?518192-1/fed-chair-powell-expects-interest-rates-increase-quarter-percentage-point. The question and answer with Congressman Bill Huizenga went as follows (time 1:45).
Huizenga: I’M GOING TO MOVE ON TO ANOTHER ISSUE WHICH IS RULES BASED APPROACH TO MONETARY POLICY. I’M SORRY IN THE 114th CONGRESS I THINK IT WAS IN 2015 I INTRODUCED THE FORM* ACT WHICH WOULD LAY OUT A RULES-BASED MONETARY POLICY AND I KNOW IN YOUR TESTIMONY TODAY INDICATED THAT A RATE INCREASE IS EXPECTED AND YOU CONFIRM THAT WITH THE RANKING MEMBER. SO, WHAT I’M CURIOUS THOUGH IS SINCE 2017 THE FED’S FEDERAL MONETARY REPORT INCLUDING MONETARY POLICY RULES. YOU’VE BEEN VERY CLEAR AND NOW SECRETARY YELLEN HAS BEEN CLEAR THAT A LOT OF RULES ARE MODELED AND LOOKED AT. THE ONLY EXCEPTION TO THIS WAS 2020, THE FIRST YEAR OF THE PANDEMIC. AND MAYBE MORE SURPRISINGLY, THE REPORT THAT WAS JUST RELEASED THIS MONTH. FOR EXAMPLE, IN 2017 MONETARY POLICY RULE SECTION OF THE REPORT STATED, QUOTE, MONETARY POLICYMAKERS CONSIDER A WIDE RANGE OF INFORMATION ON CURRENT ECONOMIC CONDITIONS. IT’S NOT INCLUDED IN THIS REPORT. CAN YOU SHED SOME LIGHT ON WHY IT WAS ADMITTED THIS YEAR?
Powell: YOU KNOW, I HONESTLY DIDN’T KNOW THAT WAS THE CASE OR IF SOMEONE TALKED TO ME ABOUT THIS BEFORE THE THING WAS PRINTED AND SENT UP HERE, I DON’T REMEMBER. THAT IS ALSO A REAL POSSIBILITY GIVEN THE NUMBER OF THINGS I HAVE ON MY MIND RIGHT NOW. AS YOU SAY, WE DIDN’T HAVE IT IN JULY OF 20. WE’LL HAVE IT IN THE NEXT ONE. IT WAS NO BIG THOUGHT, AS FAR AS I KNOW, GOING INTO THAT. SOMETIMES WE INCLUDE IT, SOMETIMES WE DON’T. I WILL SAY THINKING ABOUT POLICY THROUGH RULES IS SOMETHING THAT I LEARNED A LOT ABOUT MONETARY POLICY DOING THAT. WHEN YOU’RE ACTUALLY IMPLEMENTING POLICY, NO COMMITTEE HAS EVER REALLY USED POLICY RULES AS A WAY OF SETTING POLICY. USE THEM TO INFORM YOUR THINKING.
Huizenga: YES, I GUESS MY IDEA WITH THE FORMAT* WAS TO THEN INFORM THE MARKET AND THAT INCLUDES US AS CITIZENS, AS WELL. I’D LIKE THIS COMMITTEE TO REEXAMINE THAT.
*Note that FORM and FORMAT refer to the Fed Oversight Reform and Modernization Act.
The detailed questions and answers with Representative French Hill are here (time near 2:01)
Hill: I DO ENCOURAGE PEOPLE TO READ THIS REPORT BECAUSE INFLATION IS A THIEF. YOU ANSWERED THE QUESTION TO MR. HUIZENGA YOU WERE NOT AWARE IN THE 2022 MONETARY POLICY REPORT THAT THE RULES SECTIONS IN THE MONETARY POLICY WAS NOT INCLUDED. IS THAT RIGHT?
Powell: I WAS AWARE OF IT A COUPLE DAYS AGO. WHAT I SAID IS I DON’T REMEMBER ANY PRIOR DISCUSSION. BUT THAT DOESN’T MEAN IT DIDN’T HAPPEN. IT JUST MEANS I DON’T REMEMBER IT.
Hill: IN THE FOMC MEETINGS, DO THEY STILL HAVE A PRESENTATION START OF THE STAFF PRESENTATION SORT OF A TREND ANALYSIS ON USING THOSE RULES THAT ARE TRADITIONALLY IN THE POLICY REPORT. DOES THAT STILL GO ON IN FOMC MEETINGS?
Hill: I THINK THAT’S AN INDICATION THAT IS PROBABLY BEST THAT IT BE INCLUDED IN THE REPORT. I WAS LOOKING AT SOME FORECASTING ABOUT THE SO-CALLED TAYLOR RULE DATING TO THE 1990s WHICH YOU’VE TESTIFIED ON MANY TIMES. ARE YOU AWARE OF WHAT THE TAYLOR RULE WOULD INDICATE NOW IN ITS FORMULA VIS-A-VIS THE INFLATION WE HAVE TODAY?
Powell: GENERALLY, YEAH.
Hill: DO YOU KNOW THE RANGE?
Hill: THE ANSWER I SAW WAS 9.55%. WHICH DOESN’T MEAN IT’S RIGHT OR WRONG, BUT IT’S ONE OF THE INDICATORS ABOUT HOW FAR OFF WE ARE MAYBE IN OUR FUNDS RATE TARGETING. SO, I’M GLAD TO HEAR YOU’LL CONSIDER THAT BEING PUT BACK IN THE REPORT.
And the detailed question and answer session with Senator Bill Hagerty is here https://www.c-span.org/video/?518193-1/acting-federal-reserve-chair-testifies-economy (at time 1:45)
Hagerty IT FEELS LIKE THE FED IS BEHIND THE CURVE RIGHT NOW AND MAY HAVE TO TAKE MORE AGGRESSIVE ACTIONS THAN OTHERWISE WOULD HAVE BEEN THE CASE, AND THE MONETARY POLICY REPORT EMITTED THE MONETARY POLICY RULES, AND I KNOW THEY ARE NOT INTENDED TO BE SCRIPTED THERE AND THEY ARE THERE TO CONSULT AND IT WAS CONCERNING THAT THEY WERE MISSING. I THINK THE RULES WOULD HAVE INDICATED THAT WE’RE BEHIND THE CURVE, THAT THERE IS MORE TO BE DONE ON INFLATION. IT BROUGHT ME TO THINK ABOUT HOW DOES THE FED THINK ABOUT ACCOUNTABILITY, HOW DO YOU THINK ABOUT HOLDING THE FED ACCOUNTABLE FOR MANAGING INFLATION?
Powell. WE’LL BRING THEM BACK FOR THE JULY. SOMETIMES WE DO AND SOMETIMES DON’T. I WOULD RECOMMEND LOOKING AT THE CLEVELAND FED, IT HAS REALLY ALL OF THE RULES, AND THERE’S A RANGE OF RULES BUT CLEARLY THE MEDIAN RULE IS, YOU KNOW, THERE. SO IN TERMS OF ACCOUNTABILITY, IT STARTS WITH TRANSPARENCY FROM US AND EXPLAINING TO YOU. YOU ARE THE MECHANISM THROUGH WHICH WE GET OUR TRANSPARENCY. WE DELIVER TRANSPARENCY AND WE GET OUR DEMOCRATIC ACCOUNTABILITY BY EXPLAINING OURSELVES IN UNDERSTANDABLE TERMS TO YOU AND YOU HOLDING US ACCOUNTABLE AND OUR SYSTEM OF GOVERNMENT IT RUNS THROUGH THIS COMMITTEE AND THE SENATE AND THE HOUSE AS WELL. WE TRY TO BE VERY TRANSPARENT. WE TRY TO BE ENGAGED WITH MEMBERS TO EXPLAIN AND HEAR YOUR CONCERNS AND THOSE KINDS OF THINGS. ULTIMATELY, IT’S THE BOTTOM LINE. WE BOTH COME FROM THE BUSINESS WORLD AND IT’S WHAT YOU DELIVER, AND WE NEED TO DELIVER PRICE STABILITY AND WE ARE NOT CURRENTLY DOING THAT AND WE ARE HIGHLY MOTIVATED TO GET THE ECONOMY BACK TO WHERE WE HAVE THAT UNDER CONTROL.