Friday, March 1, 2019

Monetary Policy and the State of the Economy

On February 27th, The Committee on Financial Services of the US House held a hearing “Monetary Policy and the State of the Economy.” Chairman of the Board of Governors of the Federal Reserve System, Jerome Powell was the only witness. Lanxi He, Research Analyst Intern, Creative Investment. Georgetown University, attended the hearing and provided input for this post.

The Federal Reserve Act (FRA) directs the Chairman of the Fed to testify before the House Committee on Financial Services and the Senate Committee on Banking twice a year. The testimony focuses on the management of monetary policy and its impact on domestic and global economic developments. Each appearance requires the Board submit a Monetary Policy Report.

During this hearing, House members cited China's economic growth and the political allocation of capital. This line of questioning recalled the view of University of Chicago Professor Chang-Tai Hsieh.

On February 25th, The Becker Friedman Institute for Economics (BFI), the Chicago Economics Society (CES), and the Booth Alumni Club of Washington, DC, held a cocktails and a conversation event titled "Crony Capitalism with Chinese Characteristics."

At this event, Professor Hsieh discussed China’s unprecedented economic growth over three decades, stating that this growth has defied economic theory. In Professor Hsieh's view, China has developed a system of "crony capitalism" at the local level that has promoted the development of local businesses.

Chairman Powell stated that the US GDP growth and the unemployment rate were both very close to Fed targets, so there was little likelihood that changes in monetary policy would improve them. He implied there was more risk than benefit in further rate hikes.

House members pointed to bank profits, currently $237.5 billion at last measure, an all time high, as evidence that the banking sector was doing fine and that more of the Fed's attention needed to be placed on income inequality. The Chairman cited job differences in the unemployment rate between rural (higher) and urban (lower) areas as one of the Fed's current concerns, a questionable refocusing given demographic differences between the two areas.

Financial Service Committee members also asked the Chairman about Federal Reserve policy concerning Fannie Mae and Freddie Mac, still under government control. Mr. Powell was noncommittal about policy in this area.

In one of the more interesting developments, Committee Member Rep. Al Green, from Texas's 9th congressional district, requested a study from the Fed on the economic impact of racial and gender discrimination. It is our view that racial and gender discrimination lower aggregate economic output, so reductions in both may lead to an increase in US GDP.