Almost one year ago today, Federal Reserve Chair Jerome Powell appeared on 60 Minutes explaining to the world that as a Central Bank, they have the ability to “create money digitally.” Sadly, it seems the only change since then has been the size of Fed’s balance sheet. Over the weekend, Powell reunited with 60 Minutes where he shared his views and developments of the economy in the face of COVID.
Powell said many contentious claims in the interview. Calling the CARES Act “heroic” is one example. Another:
Congress, in effect, replaced people’s income, kept incomes, kept them in their homes, kept them solvent, kept their lives together…
He discussed the usual fare such as the importance of maximum employment, inflation targets, the Fed’s work on the digital dollar, and vaccinations, of which Powell said he received two doses already. By far, the most interesting was when the question of the 2% inflation target came up:
SCOTT PELLEY: Getting back to your inflation target, why 2%? Why is that the magic number?
In a previous article, I wrote about the Origins of the 2% Inflation Target, how it came about arbitrarily then popularized across the world. Unfortunately, it’s a goal made with absolutely no merit or basis. Nonetheless, everyone is entitled to their opinion. Here is the one given by one of the most powerful men in the world:
JEROME POWELL: Two percent is what central banks around the world came to, you know, over the last really 40 years. It is the standard that all banks target. And you may really be asking, “Why not zero?” And the reason is that interest rates--every interest rate-- includes an estimate of future inflation. So if you’re lending money, you’re going to get paid for future inflation. You’re also going to have a real return. And if inflation were to be zero rather than 2%, then interest rates would be 2% lower, by definition. And what that would mean is that central banks, including the Fed, we have much less room to cut rates and support the economy-- when the economy turns down.
He notes 2% is the standard, and “all banks” target 2%, but doesn’t explain why... Powell quickly changes the question to “why not zero?” then answers his own question by claiming “every interest rate includes an estimate of future inflation,” of course, purposely vague, given inflation isn’t identified. There are other concerns, such as how the Fed sets its interest rates to account for future inflation, what causes said inflation, why not 3% inflation, etc., to make a list of the follow-up questions Scott Pelley should have inquired.
After a few more explanations, Powell settles on the idea that a 2% inflation rate influences interest rates, which should be somewhat high so interest rates can be cut in the future, “when the economy turns down.”
Unfortunately, the problem with this type of interview is that it doesn’t get to the heart of the matter. When asked about why 2% inflation, there was no follow up to challenge Powell. Other than trying to explain the 2% target, very little was said that didn’t echo Powell’s normal stance when addressing the public.
