Today Jay Powell had his first appearance before Congress as Chairman of the Federal Reserve, confirming that his leadership at the Fed will look very similar to Janet Yellen. Though his testimony did note that 2018 has witnessed some volatility in the stock market and other assets, he maintained the same positive outlook of his predecessor. Perhaps alluding to the impact of Republican tax cuts, Powell went as far to say that he was more optimistic about the economies future than he was in December - leading markets to believe that a fourth rate hike may be possible this year.
Powell faced several questions from Republicans regarding the Fed’s payment of interest rates on excess reserves at the Fed. This tool, which Congress gave the Fed in 2006 and then sped up its implementation in 2008, has increasingly come under attack from Chairman Jeb Hensarling. Voicing many of the criticisms made by George Selgin and others, Hensarling grilled Powell on whether the Fed’s current use of IOER has far exceeded the original aims of Congress - a charge Powell denied. While it’s encouraging to seen increased scrutiny paid to what, in practice, is a blatant subsidy to Wall Street - potentially reversing this policy tool brings its own risks. After all, it is the fact that over $2 trillion remains parked within the Fed that has helped limit the inflationary consequences of qualitative easing. Letting that money leave the Fed’s vaults and loaned out in the fractional reserve system could lead to significant inflation. This is simply one of the many challenges the Fed faces in the near future.
Meanwhile, the Democrat’s questioning of Powell offered little in terms of substance.The lack of diversity - superficial, not ideological - within the Fed has become the go-to talking point during these sort of hearings. Other questions were aimed to get Powell to criticize various policies of the Trump administration, with Powell avoiding falling into any such traps.
