U.S. Rep. Alexandria Ocasio-Cortez (D-NY), speaks at the 2019 National Action Network National Convention in New York, April 5, 2019.
Lucas Jackson | Reuters
National Economic Council Director Larry Kudlow praised Democratic Rep. Alexandria Ocasio-Cortez on Thursday after the left-wing lawmaker from New York urged Federal Reserve Chair Jerome Powell to keep monetary policy loose because inflation was not an issue, something that President Donald Trump and his administration have been pushing for.
“I know I’m a supply side conservative and so forth, but I want to note in the hearings yesterday with Fed Chairman Jay Powell, it was Ms. AOC who asked him about the Phillips curve,” Kudlow told Fox News on Thursday. “Why is rising growth and low unemployment bad? Why does that cause higher inflation and interest rates? Powell said ‘well, you’re right. That thing hasn’t worked in decades.'”
“I’ve got to give her high marks for that. She got that out of the chairman. By the way, that’s been my position. That’s been the president’s position. Strong growth does not cause higher inflation,” Kudlow said, adding he would like to discuss “supply-side economics” with Ocasio-Cortez in the future.
The Phillips curve is a mechanism that suggests a lower unemployment rate will lead to stronger inflationary pressures. However, that relationship has deteriorated in recent years as inflation remains muted and the U.S. unemployment rate sits at 3.7%, around a 50-year low. The curve has been a part of the Fed’s policymaking process for decades.
Powell testified in front of the House Financial Services Committee on Wednesday. During the Q&A portion, Ocasio-Cortez said economists “are increasingly worried” that the Phillips curve is “no longer describing what is happening in today’s economy.” She then asked Powell if the Fed was considering this deteriorating relationship between inflation and unemployment.
Powell responded in the affirmative, noting: “We have learned that the economy can sustain much lower unemployment than we thought without troubling levels of inflation.”
Ocasio-Cortez’s questioning showcased a rare moment of agreement between the lawmaker and the Trump administration. Since last year, Trump has urged the Fed to keep rates lower, noting that tighter monetary policy would hinder economic growth as well as corporate profits.
While Ocasio-Cortez’s questioning of Powell suggests she also believes the Fed shouldn’t tighten monetary policy right now, she also had another motive. Some economic policies of the politically left are often shot down by Republicans on fears they would cause inflation.
“Do you think that could have implications in terms of policymaking? That there is perhaps room for increased tolerance of policies that have historically been thought to drive inflation?” Ocasio-Cortez asked Powell. “One of the arguments about minimum wage or other policies that directly target middle-class Americans is that they could drive inflation.”
Powell responded by saying the Fed has learned “that downward pressure on inflation around the globe and in here is stronger than we thought.”
It is increasingly likely the Fed will lower rates this month. Powell testified Wednesday that “crosscurrents ” from weak economic activity overseas and lingering trade tensions are dampening the U.S. economic outlook, bolstering expectations for a rate cut.