Volcker’s courage, Volcker insisted that tax reductions should fit into a program of further spending cuts
Days before a new president promising tax cuts was about to take office, the chair of the Federal Reserve warned in a Senate hearing about stimulatory fiscal policy stoking inflation and keeping interest rates high.
That was January 1981. Paul Volcker told lawmakers that budget policy already tended to "strongly aggravate interest rate pressures" against a backdrop of high inflation, according to a New York Times account, at the time. And he emphasized that fiscal policy "is the most important" instrument besides monetary policy in stemming the surge in prices.
Months later, before President Ronald Reagan's first tax-cut package, Volcker insisted that tax reductions should fit into a program of further spending cuts.
Fast forward to today, and former President Donald Trump is pledging a fresh round of tax cuts if elected again in November. His likely opponent, Vice President Kamala Harris, has backed an expansion in social programs in the past. It's possible for economists to speculate that either one could adopt a fiscal stance that proves inflationary.
Which could prove awkward for the Fed, just as it gets going on easing monetary policy. After their two-day meeting ends Wednesday, the widespread expectation is for Chair Jerome Powell and his colleagues to signal they're ready to move in September.
Would or should Powell and others at the Fed call out fiscal proposals? It's unlikely, at least for now. But as the Fed embarks on a fresh review of its overall policy framework — due to start later this year — that could be one question to address.
Looking back to 2021, many economists agree the Biden administration's $1.9 trillion aid package helped to stoke demand at a time when supply was constrained, contributing in some measure to the subsequent surge in cost of living. Regardless, Powell has acknowledged that the Fed in hindsight ought to have tightened policy sooner than it did.
Based on that experience, "the Fed may become much more vocal in warning of a policy rate response" the next time that it looks like inflation will pick up steam, Steve Englander at Standard Chartered wrote in a recent note.
That was January 1981. Paul Volcker told lawmakers that budget policy already tended to "strongly aggravate interest rate pressures" against a backdrop of high inflation, according to a New York Times account, at the time. And he emphasized that fiscal policy "is the most important" instrument besides monetary policy in stemming the surge in prices.
Months later, before President Ronald Reagan's first tax-cut package, Volcker insisted that tax reductions should fit into a program of further spending cuts.
Former Fed Chair Paul Volcker Photographer: Pete Marovich
Fast forward to today, and former President Donald Trump is pledging a fresh round of tax cuts if elected again in November. His likely opponent, Vice President Kamala Harris, has backed an expansion in social programs in the past. It's possible for economists to speculate that either one could adopt a fiscal stance that proves inflationary.
Which could prove awkward for the Fed, just as it gets going on easing monetary policy. After their two-day meeting ends Wednesday, the widespread expectation is for Chair Jerome Powell and his colleagues to signal they're ready to move in September.
Would or should Powell and others at the Fed call out fiscal proposals? It's unlikely, at least for now. But as the Fed embarks on a fresh review of its overall policy framework — due to start later this year — that could be one question to address.
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Looking back to 2021, many economists agree the Biden administration's $1.9 trillion aid package helped to stoke demand at a time when supply was constrained, contributing in some measure to the subsequent surge in cost of living. Regardless, Powell has acknowledged that the Fed in hindsight ought to have tightened policy sooner than it did.
Based on that experience, "the Fed may become much more vocal in warning of a policy rate response" the next time that it looks like inflation will pick up steam, Steve Englander at Standard Chartered wrote in a recent note.
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