Sen. John Kennedy (R-Louisiana) recently grilled Fed chair Powell in the Senate Banking Committee Hearing about the well-established relationship between unemployment and inflation, “When you’re slowing the economy, you’re trying to put people out of work. That’s your job, is it not?”
Senator Kennedy went on to highlight economic research showing that a 3.6% increase in unemployment is needed to reduce the CPI by 2% (a reference to the Phillips Curve). Powell concurred with this assessment by stating “that’s what the record would say”. Kennedy suggested that with the CPI currently at 6.4%, efforts to lower inflation to the Fed’s 2% target would require putting another 7.2% of the working population out of work. To bring inflation to 2%, the unemployment rate would have to go to 10.6%.
Senator Kennedy suggested a far superior approach to taming inflation would allow Americans to keep their jobs: eliminate government deficit spending and borrowing. As deficit spending is a well-known form of Keynesian economic stimulus (completely contrary to Powell’s effort to cool the economy), the Federal government could simply cut spending to tame inflation. In any case, the Federal government may soon find that it has no choice but to spend within its means if nobody is left to purchase its debt but Powell. Unfortunately, this is not something Uncle Sam has been able to pull off since 4Q47 (albeit just for a single quarter).