Fed chairman Jerome Powell shoots down Ocasio-Cortez’s big deficit idea

Fed chairman Jerome Powell shoots down Ocasio-Cortez’s big deficit idea


Ms Ocasio-Cortez, who this month launched a “Green New Deal” grab-bag of promises backed by prominent Senate Democrat presidency contenders, supports a new theory dubbed by some as Modern Monetary Theory. MMT asserts Congress need only raise taxes to pay for its deficit spending when inflation quickens.

Even more conventional mainstream economists are increasingly promoting the idea that Washington should “end its debt obsession”.

Former Treasury secretary Lawrence Summers and Jason Furman, former top economics advisor to Barack Obama, recently wrote a widely-citedForeign Affairsarticle arguing in favour of spending on urgent social problems rather than deficit reduction.

Mr Powell conceded that he has not read up on MMT but said he had heard some “pretty extreme claims” about how it might work in practice, which includes the Fed running easy monetary policy to support the spending splurge.

“Our role is not to provide support for particular policies… it is to try to achieve maximum employment and stable prices,” Mr Powell said.

US stocks were largely unmoved by the chairman’s testimony to Congress with the Dow Jones Industrial Average little changed in afternoon trade.

On current monetary policy settings Mr Powell emphasised that “muted inflation pressures” have given the Fed scope to “watch and wait and see how the situation evolves”.

Mr Powell said the economy has been producing some “cross currents and conflicting signals” which support his “patient approach”.

“Going forward, our policy decisions will continue to be data dependent and will take into account new information as economic conditions.”

Amherst Pierpont Securities chief economist Stephen Stanley said Mr Powell’s testimony on interest rates “breaks no new ground”.

However, his interventions into the US political economy debate around debt and deficits could trigger further debate.

His remarks coincided with a fresh warning from the nonpartisan Congressional Budget Office which said Treasury should be able to avoid an increase in the US debt limit until late summer of early fall.

The debt ceiling is currently suspended and due to come back into effect on March 2. But Treasury can shuffle funds using “extraordinary measures” to delay a default on payments, the budget office said.

Responding to questions from senators, Mr Powell said it “would be a very big deal” if the US failed to pay its bills on time in the event it fails to again raise the federal borrowing limit.

Most expect the cap to be reinstated on Saturday at $US22 trillion ($31 trillion) but the prospect is rising there will be another debt-ceiling row in Congress late summer when the limit is set to be exceeded.

Mr Powell told lawmakers that a default on US debt is “beyond even considering”.

“It’s unthinkable to use the debt ceiling to hold the economy hostage.”

Mr Powell failed to provide any additional insight into his plans to halt the reduction of the Fed’s balance sheet later this year.

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