Federal Reserve Chairman Jerome Powell was before the Senate Banking Committee today to present the semiannual Monetary Policy Report to Congress. Unfortunately, there was little discussion of monetary policy during the proceedings.


The Senators spent nearly all of their time asking the Chairman about the recent stress tests, changes to the tax code, and concerns over additional tariffs. On tariffs, Powell deserves credit for plainly stating that “in general, countries that have remained open to trade and haven’t erected barriers, including tariffs, have grown faster, have had higher incomes, [and] higher productivity, and countries that have…gone in a more protectionist direction have done worse.”


While many Senators ignored monetary policy, the one notable exception came when Senator Pat Toomey asked whether the flattening yield curve on bonds would cause the Fed to adjust either its path for interest rates increases or the pace of its balance sheet reduction.


A flattening yield curve means the difference, or spread, between short‐ and long‐​term bonds is narrowing. When short‐​term bond yields end up higher than those on long‐​term bonds, then the yield curve has inverted. The concern that Toomey’s question points to is that, in the past, an inverted yield curve has typically signaled a coming recession.


Rather than a direct response to what the flatter yield curve potentially means for normalizing monetary policy, Powell delivered his weakest answer of the day. He admitted that the Fed has discussed yield curve dynamics in policy meetings, that “different people think about it different ways,” and that he tries to understand the yield curve in terms of what it says about neutral interest rates. He ignored the part of the question about whether or not the narrowing spread was signaling a potential economic slowdown—something not lost on seasoned Fed watchers.


While the Senators’ questions left a lot to be desired on the monetary front, the Chairman’s prepared remarks were a bit more encouraging. There, as David Beckworth notes, Powell once again highlighted the FOMC’s use of monetary policy rules when setting policy. It was only a year ago that the Fed added a new section to its semiannual report on monetary policy rules. That the Fed has continued to update and expand that section in subsequent reports is welcome news. However, Powell discusses monetary policy rules as useful insofar as they guide FOMC decisions on the path of interest rates. Because they do not accurately reflect the stance of monetary policy, this laser focus on interest rates can be problematic.


To truly improve the Fed’s performance, Powell should move beyond policy rules that fixate on interest rates and instead explore a monetary regime that would enhance macroeconomic stability.


Powell will be on the Hill again tomorrow, before the House Committee on Financial Services.