Kennedy to the Fed's Barr: 'Stopped Spending Money Like It Was Ditch Water' (November 15, 2022)

On November 15, 2022, the Senate Banking Committee held an oversight hearing with the country’s top bank and credit union regulators, including Michael Barr, the Federal Reserve’s vice chair for supervision [1]. The cryptocurrency exchange FTX had filed for bankruptcy four days earlier [9], and consumer prices were 7.7 percent higher than a year before [6]. Sen. John Kennedy, a Louisiana Republican, spent part of his time on FTX and the rest pressing Barr on whether federal spending was making the Fed’s job harder. This video shows that exchange. All quotes are from the official hearing record, Senate Hearing 117-753 [1].

Key Moments

”Who was watching these chuckleheads?”

Kennedy began with FTX. “Would any single one of you hire Sam Bankman-Fried to manage a food truck?” he asked. “Do you know who was watching these chuckleheads?” Martin Gruenberg, the acting chair of the FDIC, answered that FTX “was not engaged in the banking business or in credit union business” and that “you would probably want to engage with the market regulators, the SEC and the CFTC” [1].

”Unemployment has to rise”

Kennedy then turned to Barr, whom he addressed as “Mr. Chairman.” He cited economists Jason Furman, who he said believed “unemployment has to rise by 5 percentage points for a whole year to bring inflation down a single percent,” and Larry Summers, who he said believed “unemployment is going to have to rise to 7.5 percent and stay there for 2 years to get inflation down 2 percent.” “Do you agree with that?” “I think that we are going to see softening in the economy, but I do not have a prediction as precise as that one,” Barr said [1].

”Stopped spending money like it was ditch water”

“If Congress cooperated and stopped spending money like it was ditch water, the Fed would not have to raise rates as high. Is that a fair statement, to get control of inflation, of course?” Kennedy asked. “I really will not have any comment on fiscal policy,” Barr said. “We take the fiscal policy that elected Members of Congress and the President enact, and we calculate those in our decisionmaking.” “You are not telling me that fiscal policy has nothing to do with inflation, are you?” “I am telling you that at the Fed we take our monetary policy responsibilities as ours, and we leave to the elected----” “Well, do you not think you have a moral obligation, if not a legal obligation, if you think fiscal policy is contributing to the inflation to say something, for God’s sakes?” Kennedy said. “I think it is important for us to respect the role of the Congress and the President in setting fiscal policy,” Barr answered [1].

”Duh”

“Can you tell me, given the path we are on, how high unemployment is going to go in order to get inflation down?” Kennedy asked. “I think we are going to see unemployment go up, but I do not have a precise answer to your question,” Barr said. “Duh. I think you are right. I do not mean to make light of you,” Kennedy said [1].

Fact Check

Summers. Accurate. In a June 2022 speech in London, Summers said: “We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment” [2].
Furman. We could not find Furman’s own statement. The American Prospect later reported that Furman “estimated the sacrifice ratio was six,” meaning six percentage-point years of unemployment for each point of inflation, a little higher than the five Kennedy cited [3].
Barr’s refusal. Fed Chair Jerome Powell gave Kennedy a similar answer four months later, saying he did not think fiscal policy was “a big factor driving inflation at this moment” (see our article on that hearing).
Fiscal policy and inflation. Kennedy’s premise had support in Fed research: a 2022 San Francisco Fed analysis estimated that pandemic-era fiscal support “may have contributed to about 3 percentage points of the rise in U.S. inflation through the end of 2021” [4].

What Happened Next

The forecasts: The predictions Kennedy cited did not come to pass. By June 2023, inflation had fallen to 3.0 percent while the unemployment rate was 3.6 percent [5][7]. Writing in February 2024 about the period through November 2023, the American Prospect noted: “Over that entire period, the unemployment rate never hit 4 percent” [3].
FTX: Sam Bankman-Fried was arrested in the Bahamas on December 12, 2022, less than a month after the hearing [8]. On November 2, 2023, a jury found him guilty of all seven criminal charges he faced [9].