Questions for Fed Chair Powell
Some things to consider ahead of Chair Powell's testimony on the Monetary Policy Report
This week Federal Reserve Chair Jerome Powell goes before the U.S. House Financial Services Committee for the Semiannual Monetary Policy Report to Congress.
As the Fed continues to grapple with persistent inflation, a large balance sheet, and the macroeconomic effects of a ballooning national debt, below are some questions I would ask Chair Powell if given the chance. Each speaks to a deeper concern: the long-term erosion of market signals, institutional overreach, and the growing tension between monetary policy and fiscal irresponsibility.
With federal debt and net interest payments projected to consume an ever-larger share of GDP, the line between monetary and fiscal policy grows blurrier. The risk isn’t just economic, it’s institutional.
1. Given the current trajectory of federal debt and interest payments as a share of GDP, what risks do you see to the Fed’s ability to conduct monetary policy independently over the long term?
Since the Great Financial Crises, the Fed has dramatically expanded its footprint in the Treasury market, often intervening in an attempt to assure a smooth functioning, stable Treasury market. It has its standing repo facility and seems prepared to provide loans at par against discounted treasury securities.
2. Given this, markets have come to expect that the Fed will always be there to keep the Treasury market "smoothly functioning" and/or "liquid." Is this correct? And can this be called a third mandate? Does such a mandate compromise Fed independence?
The Fed’s remittances to the Treasury, totaling over $835 billion from 2013 to 2022, have become a significant, though unofficial, fiscal resource. In recent years, with rising interest expenses and unrealized portfolio losses, those remittances have turned negative.
3. Shouldn’t the Fed be more transparent about how its balance sheet policies, including interest on reserves and asset holdings, affect the federal budget?
According to the Fiscal Theory of the Price Level, inflation is ultimately determined by the credibility of future fiscal adjustments. In this framework, raising rates without fiscal restraint could perversely fuel inflation rather than contain it.
4. If Congress remains unwilling to reduce deficits or commit credibly to future primary surpluses, isn’t there a risk that future interest rate hikes could be inflationary, not disinflationary, by undermining the real value of government debt rather than reinforcing price stability? How does the Fed plan to counteract inflation if fiscal policy remains structurally expansionary?
The prospect of fiscal dominance, where monetary policy becomes subordinate to the financing needs of the Treasury, is no longer theoretical. With debt levels rising and little political appetite for austerity, the pressure on the Fed may only grow.
5. To what extent does the Fed factor in fiscal dominance scenarios, where monetary policy becomes subservient to fiscal needs, into its long-term planning?
The extended era of near-zero interest rates and massive asset purchases encouraged a debt-fueled boom in speculative investment and malinvestment. That distortion has yet to fully unwind.
6. Would you agree that years of unconventional monetary policy contributed to the misallocation of capital and a boom in unproductive debt issuance?
7. An independent Federal Reserve is considered essential to good monetary policy. However, since money policy is Congress's responsibility, would it not be wise to limit Fed discretion to introduce significant “unconventional” (i.e. QE) policy without congressional approval?
Even as short-term rates have risen, long-duration yields remain shaped by a decade of heavy Fed intervention. This continues to mask true risk pricing and distorts capital allocation.
8. What steps, if any, is the Fed taking to unwind its influence on long-duration interest rates and allow market signals to function more freely?
The Fed often talks about a more "normal" balance sheet and "ample reserves."
9. As the national debt continues to grow at an unprecedented pace, and pressures grow for the Fed to support Treasury's auctions, how does the FOMC define "normal" and/or "ample" balance sheet?
Despite persistent inflation and a still-elevated balance sheet, the Fed has chosen to slow the pace of QT. This raises the question of whether normalization is truly a priority.
10. The Federal Reserve recently announced a reduction in the balance sheet runoff to just $5 billion a month. Shouldn’t quantitative tightening be proceeding more aggressively, especially given inflation’s persistence and the need to normalize monetary policy?
Many economists warned of inflation risks as early as 2021. The Fed’s delay in tightening policy raises concerns about institutional blind spots and groupthink.
11. Looking back, would you concede that the Fed was too slow to act on inflation in 2021–22, and what institutional changes could help prevent similar delays in the future?
In recent years, regional Fed banks have increasingly weighed in on topics like climate risk, racial equity, and inequality: areas far afield from the central bank’s core mandate.
12. Do you see a risk that such involvement dilutes the Fed’s core mandate and threatens its credibility?
The Federal Reserve plays an important role in maintaining macroeconomic stability, yet its policies increasingly operate within a web of fiscal recklessness, political pressure, and self-inflicted mission creep. These questions are not about second-guessing the Fed’s dual mandate but about confronting the deeper structural issues that threaten its long-term effectiveness and credibility.
If monetary policy is to remain an anchor of stability rather than a source of distortion, we need more than just rate adjustments. We need institutional clarity, fiscal responsibility, and a recommitment to sound money. Chair Powell deserves credit for navigating difficult terrain, but the path ahead demands sharper scrutiny and more honest dialogue about the limits of what the Fed can do alone.