Despite fiscal policy falling outside the purview of the Federal Reserve, pressing fiscal issues overshadowed monetary policy in this year’s Semiannual Monetary Policy Report to Congress. Chairman of the Federal Reserve Jerome Powell asserted the strength of the economy and reaffirmed the importance of basic pro-growth economic principles, including limited taxation and free trade.
Chairman Powell emphasized economic growth, specifically citing an expanding job market, rising after-tax income, and increased consumer spending. An average of 215,000 net new jobs were generated each month of this year. The unemployment rate is wavering around 4%. Meanwhile, the labor force participation rate remaining stable illustrates working-age people are re-entering the labor force, considering that a large number of baby boomers are reaching retirement. Core inflation, which Chairman Powell considers a better metric for future inflation, was at 2.0% for the twelve months ending in May which comports nicely with the Fed’s goal of keeping inflation near 2%.
While the purpose of the meeting was to assess the Federal Reserve’s role in effectuating prudential monetary policy, many senators on the committee used this opportunity to interrogate Chairman Powell on issues that fall well outside the purview of the Federal Reserve. The two foremost issues were the effects of the last year’s tax cuts and the implications of tariffs on the economy. While Chairman Powell did not opine on specific policies brought forth from the Trump administration, he was willing to expound economic principles conducive for growth.
Despite criticism from several senators of the Democratic party suggesting that the effects of the tax cuts were futile, Chairman Powell maintained that the tax cuts have contributed to current economic growth. When pressed by Senator Mike Rounds (R-SD) about the impact of the tax cuts, Chairman Powell replied that "the tax bill would provide meaningful support to the demand for at least the next 2-3 years” and that it “might have effects on the supply side as well” through encouraging investment, resulting in higher productivity. In fact, productivity became a central topic of discussion when discussing stagnant wages in recent decades. When asked by Senator Corker about solutions for increasing real wages, Powell said that, in the long run, productivity is the only way to generate higher wages. Powell’s sentiments about productivity are manifestly correct and reflect the near-consensus among mainstream economists. In order to discredit this notion, critics are quick to speciously point out great divergence of wages from productivity in recent times, but when accounting for non-cash compensation, the gap eminently converges to a near correlation.
Lastly, much of the discussion revolved around the ramifications of tariffs. Senators Corker (R-TN) and Toomey (R-PA), recent champions of the free trade initiative, were joined by Senator Tim Scott (R-SC), among others, in conveying the importance of free trade. Sen. Scott underscored the importance of trade to his state of South Carolina and asked Chairman Powell about the impact tariffs have on the economy. While Chairman Powell made sure to abstain from critiquing a particular policy, he noted that “in general, countries that have remained open to trade, that haven’t erected barriers including tariffs, have grown faster.” Furthermore, he affirmed Senator Toomey’s contention that tariffs are a threat to wage growth because the uncertainty leads to a reduction of capital expenditure.
Despite the stark division in Washington on fiscal issues facing this country, it was encouraging to see Chairman Powell provide economic clarity and side, even if rhetorically, with positions favorable to taxpayers.