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Federal Reserve Chairman Jerome Powell on Wednesday defended the current regime for managing inflation by talking down an alternative proposal for steering the economy: Modern Monetary Theory, or MMT.
On Wednesday, Powell told the House Financial Services Committee that he disagrees with MMT’s suggestion that fiscal policy would handle the economy better than the Fed would. A day earlier he told the Senate that the core tenets of MMT are “just wrong.”
At the center of MMT: the idea that tax policy would be more effective at controlling inflation. Instead of asking the Fed to stabilize prices through tools like interest rates, MMT suggests that when prices get too high, Congress can just raise taxes. If prices dip too low, Congress can cut taxes.
The concept of taxation as a tool, not a funding mechanism, folds into MMT’s broader suggestion that the government is not constrained by its deficits and can instead print money to fund fiscal stimulus programs.
The idea is gaining traction among some Democrats because of its accommodative attitude toward ambitious but expensive programs like freshman Congresswoman Alexandria Ocasio-Cortez’s Green New Deal.
Ocasio-Cortez, a member of the House Financial Services Committee, appeared briefly in the hearing but did not stay long enough to ask Powell any questions. She was also juggling the Michael Cohen hearing today.
Powell pushback
In the House hearing Wednesday, Powell told Ohio Republican Steve Stivers that MMT is a bad idea because tackling inflation would require Congressional action, which would take longer than the Fed’s ability to “immediately” react to inflationary pressures.
“That aspect of it would be a complete change,” Powell said. “The reason why the Fed does that is that we can move quickly with our tools. And to give the legislature that responsibility — in principle you could do that — but we have a system that’s got a lot of checks and balance.”
Powell’s commentary comes a day after he told Senator David Perdue (R-Ga.) that MMT simply doesn’t work with his concerns over the “unsustainable path” of federal government debt.
“The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong,” Powell said.
He followed up by saying that he’s particularly concerned about the fact that debt is rising at a faster pace than GDP. For the fiscal year 2018, the deficit was 3.85% of GDP and a majority of business economists surveyed said they would be worried if the share of debt to GDP reaches 4%. Powell said there is “real uncertainty” about the inflection point where the U.S. government would not be able to pay its bills, adding today that “debt cannot grow faster than GDP forever.”