Jerome Powell, Interview: Cato Institute Monetary Conference

“What Paul Volcker did and the Fed did to finally get inflation under control followed several failed attempts to get inflation under control. What had happened over the course of that long period of the Great Inflation is that the public had really come to think of higher inflation as the norm and to expect it to continue, and that’s what made it so hard to get inflation down in that case. So it is very much our view, in my view that we need to act now forthrightly strongly as we have been doing, and we need to keep at it until the job is done to avoid that. We think we can avoid the very high social costs that Paul Volcker and the Fed had to bring into play in order to get inflation back down and set us up then for a long period of price stability.”

“So more broadly on rules. Of course, Taylor rules have become part of the fabric of economic analysis, particularly monetary policy analysis in ways that must be far greater than John Taylor could have hoped when he wrote his original article in 1993. But we know central bank and the Fed has never explicitly tied our monetary policy decisions to any formula, including Taylor rules, but Taylor rules, nonetheless, are ubiquitous in all of the work that we do. You have to have a variant or a way and a model of explaining how monetary policy will react in some kind of Taylor rule is now… They’re very much part of the way we think in terms of nominal income targeting.”

“As far as returning to a scarce reserve regime, I guess I would say that I think that our current operating framework is a better one, and I don’t see a case for returning to scarce reserves. Now, why is that? So the world has really changed as a result of the global financial crisis and the pandemic. The scarce reserves framework would be challenged to work in a world where there’s very high and sometimes volatile demand for safe and liquid assets. Central banks may need to rely on large-scale asset purchases again from time to time in response to severe shocks, and remember that the large financial institutions hold very, very large quantities of safe assets now as a liquidity buffer, and that includes a lot of reserves. So the bottom line is that the quantity of reserves is just so much higher, it would seem to be impractical to try to manage scarcity, and demand will be volatile too. So it doesn’t seem practical, and again, we think that the current system works well and provides a lot of liquidity to the system, which is a net gain.”