At a Senate Banking Committee hearing on Wednesday, Sen. Jim Banks (R-IN) asked Chair of the Federal Reserve Jerome Powell about the effect of tax increases on the economy.
00:00Thank you, Senator Banks. Thank you, Mr. Chairman. Chair Powell, can you talk about how our interest rates compare to other first-class countries around the world?
00:13At the higher end. And how does that affect the United States?
00:17Well, I mean, I think that reflects a couple things. One is just that the US economy has outperformed, has been stronger than others. And I don't want to pick on any other nations, but many other nations have had much lower growth, now have lower inflation, and have pretty low growth. Whereas the US economy has really been the outstanding performer and remains that to this day. That implies somewhat higher rates.
00:44So you say it's higher than most of first-class countries. Can you talk about historically where we've matched up with other countries?
00:55Yeah, I mean, so let's just go back to when the pandemic hit, for example. We were at, you know, we had very low rates during that era, but they were by far the highest in the developed world because the US economy was the strongest.
01:07The European Union had negative rates. I think the Bank of England was at 75 basis points. I think we were at 2.4 percent. So we were meaningfully higher. And again, it was a time when we were just, our growth was higher.
01:20And their growth was lower. And their inflation was lower. Our inflation was fine. Probably about the same as ours. So I think we've generally had a little bit higher rates than those countries because they've, you know, they have slower growth, older populations, lower productivity, those kind of things.
01:40We have the strongest economy in the world.
01:42Have interest rates globally gone up as well?
01:44Sorry?
01:44Have interest rates in those countries globally gone up as well?
01:47Well, they went up. All of those countries had their rates go up quite a bit during the global pandemic inflation, right? And as you know, many of them have been cutting their rates. And we had been, too. And we'll at some point resume that. But we're 100 basis points lower than we were. I think if you take the EU and the Bank of England, they've both cut a little more than that.
02:12How recently?
02:13Recently. But, you know, they're, but I think, you know, you probably read this, but, you know, they're either at or close to the, or close to the end of their cutting cycles.
02:23I know there's been a lot of talk today about deficits and the national debt. But how much does, how much does tax policy affect the economy in the U.S.?
02:34I mean, it affects, it has big effects over time. It's really not something that drives what we do. It isn't. You know, but I mean, I think, you know, tax policy plays over the long run a huge role in incentivizing investment, which helps growth and things like that.
02:53But I think, I think it's very, very important over the long run, certainly more important than monetary policy.
02:58Would a $4 trillion tax increase on middle class Americans affect the economy?
03:04Now, here we're getting into the bill.
03:06I understand. I'm asking how that would affect the economy and according to your data.
03:12I'm trying to not make any direct comments on the, on the bill today, if I, if you'll forgive me, but I take your point.
03:21Okay. I, I, I, I am trying to make a point, but there's got to be, there's got to be data that you sit on somewhere that would suggest that large tax increases would affect the economy, would stall economic growth in the U.S.
03:34You could, you could certainly get that out of a model if you wanted to. I mean, but again, I'm, I'm, I'm inevitably going to be commenting on the bill, right? If I, if I answer that question.
03:45So I, so a lot, a lot, a lot of talk today about inflation. You've already, you've already agreed that inflation is down from where it was a year ago. And would you say steadily declining?
03:56Has been. Yes. I more than agreed to it. I'm very pleased by it.
03:59And all, all of the experts and, you know, so, so-called experts tell us that tariffs lead to inflation, but you seem to, you seem to have suggested already that inflation is, if not under control, close to being under control.
04:14So inflation is in a really good place. It is definitely in a good place. And, you know, we have, we have a forecast and so does, by the way, every other, you know, well brand name forecaster in the country,
04:29which is very similar to ours, that there will be some inflation from tariffs coming, not yet, but over the course of the coming months.
04:37And I think it's reasonable to expect that because someone has to pay, you know, this is hundreds of billions of dollars of, of tariffs we're taking in.
04:44Some of that's going to fall on the consumer. Not all of it's going to fall on foreign manufacturers. And that, that's the only insight we have.
04:51I mean, we're just kind of wanting to see more data on that before we move.
04:54One, one, one final question about data. Our trade deficits with China, the EU, Canada, Mexico have all significantly dropped recently.
05:02What, what does the data tell us about that?
05:06Well, I think that's how that would affect inflation, how it would affect inflation.
05:12I don't know that it has implications for inflation, but it obviously reflects the tariffs.
05:16I think it recently, you've seen Chinese imports come down quite a bit.
