WASHINGTON, D.C. – Senator JD Vance (R-OH) questioned Federal Reserve Chairman Jay Powell on the role of the U.S. dollar as the world’s reserve currency during a hearing held by the Senate Committee on Banking, Housing, and Urban Affairs.
“When I look at the American economy, we have a lot of financial engineers and a lot of diversity consultants, we don’t have a lot of people making things, and I worry that the reserve currency status, and the lack of control we have over our currency, is perhaps driving that,” said Senator Vance. “I would love to get your feedback on that. What are the upsides and downsides of the reserve currency?”
Watch the full exchange here:
Senator Vance: Chairman Powell, thanks so much for being here. I have a question that is slightly far afield, but how often do you get to talk to the Federal Reserve chairman, so I might as well ask it.
To give some context here, my family comes from Appalachia, particularly my grandparents who grew up in Southeastern Kentucky, coal country, and then moved to Southern Ohio, where I now have the honor of representing all of Ohio. One of the things you hear a lot when you study the regional history of Appalachia is it’s often described as possessing a “resource curse,” right?
There’s a lot of coal in central Appalachia that enables a certain amount of consumption, obviously, consumption is good, people need food and medicine, and other things. There’s also a pretty good argument that for a host of reasons, it causes malinvestment in the region and consequently, you have lower productivity growth, lower innovation, and an economy that is much less diversified and much less dynamic.
I am wondering when I hear about the history, what I think about and read about the history of Appalachia and the resource curse, I am struck by the idea that you can make a similar argument about the reserve currency status of the United States dollar. Americans have enjoyed one of the greatest privileges of the international economy for the last nearly eight decades, a strong dollar that acts, of course, as the world reserve currency. You know that better than I do.
Now, this has obviously been great for American purchasing power. We enjoy cheaper imports, Americans, when we travel abroad, benefit from lower costs. But it does come at a cost to American producers. I think, in some ways you can argue that the reserve currency status is a massive subsidy to American consumers but a massive tax on American producers.
Now, I know the strong dollar is sort of the “sacred cow” of the Washington consensus, but when I survey the American economy, and I see our mass consumption of mostly useless imports on the one hand, and our hollowed-out industrial base on the other hand, I wonder if the reserve currency status also has some downsides, and not just some upsides as well.
Let me just put a final point on this, and let me get your thoughts on that, Chairman Powell. We are, of course, now the main supporter of a massive land war in Europe between the Russians and the Ukrainians. I read recently – I’m not going to comment on how perfect or precise these estimates are – but I read recently that the United States is trying to ramp up production from 14,000 artillery shells to 20,000 artillery shells, that’s per month, while the Russians are firing 20,000 artillery shells in Ukraine per day. When I look at the American economy, we have a lot of financial engineers and a lot of diversity consultants, we don’t have a lot of people making things, and I worry that the reserve currency status, and the lack of control we have over our currency, is perhaps driving that. I would love to get your feedback on that. What are the upsides and downsides of the reserve currency?
Chairman Powell: That’s a big question to try to answer … I can’t even get started with that. We are the world’s reserve currency, of course. That is because of our democratic institutions, it’s because of our control over inflation over many, many, many years. The world trusts the rule of law in the United States, and those are the things, so, once we are the world’s reserve currency, it’s used all over the world and transactions, and it’s the place where people want to be in times of stress, using dollar-denominated assets.
Now, of course, we benefit by being able to pay for our goods all over the world, pay for everything, anywhere in the world, mostly, with dollars, that’s an advantage. You know, there are some economic theories around it that it also has burdens of various kinds, but I can’t call it all back to mind.
But you know, the other thing is, you know, it’s a very stable equilibrium and it’s not a perfect one, It’s not a permanent one, rather. So, there isn’t any obvious candidate to replace the United States right now, where you could have free flow of capital in and out of the country, where you can really trust the rule of law and democratic institutions, and keeping, you know, keeping price stability, which you can here.
Senator Vance: Even if it gives us less control over our own currency, the fact that it’s become the world’s reserve currency?
Chairman Powell: Control over our currency? I’m not sure, so essentially, what we try to control is price stability. And no, it doesn’t make it harder for us to keep inflation under control. The United States is a smaller external sector than most large economies. It’s only about 15%. So, mainly, what affects inflation in the United States is domestic supply and demand, mainly.
Senator Vance: Do you think it makes it harder for us to effectively fight back against currency manipulation, to control the export and import flows in a way that stabilizes our own manufacturing sector?
Chairman Powell: Well I mean what’s important there is really the level of the dollar. When the dollar is stronger, obviously, our wears are more expensive abroad and that kind of thing. We don’t have an opinion on that kind of thing. We don’t have an opinion on — matters of the level of the dollar are really matters for the Treasury Department, and the elected government, not for the Fed.