Source: Wall Street News
In his latest interview with CNBC, Bernanke called the delay in Fed action a “mistake.” Bernanke said that inflation has become one of the most serious threats to the economy. “I think they (the Fed) agreed that it was a mistake.” As for why the move was delayed last year, Bernanke said one of the reasons was that Powell didn’t want to shock the market.
The Fed under Powell waited too long to reverse its ultra-easy monetary policy amid rising inflation, falling unemployment and soaring wages last year. Recently, many “old leaders of the Federal Reserve” have successively said that the action is too late, and the recession is almost a foregone conclusion. The latest to join this bearish camp is former Federal Reserve Chairman Ben Bernanke.
In his latest interview with CNBC, Bernanke called the delay in Fed action a “mistake.” In retrospect, Bernanke said, yes, it was a mistake. Inflation has become one of the most serious threats to the economy. “I think they (the Fed) agreed that it was a mistake.”
Bernanke pointed out that the question is why they delayed, why they delayed the response, missed the time window to tighten monetary policy, which is a complicated thing. One reason, Bernanke said, is that they don’t want to hit the market.
Powell was also on the Federal Reserve Board of Governors when he scaled back QE in 2013. It was a very unpleasant experience. Powell wants to avoid this sort of thing by warning people as much as possible. So gradualism is one of several reasons why the Fed has not responded more quickly to inflationary pressures in mid-2021.
In late summer 2020, the Fed changed its policy framework, indicating that it would allow higher-than-normal inflation to ensure a full and inclusive employment recovery. When inflation began to rise above its 2% target in the spring of 2021, the Fed said they expected high inflation to be “transitory” as factors related to the pandemic would subside.
Recently, several Fed officials have defended themselves, saying that when inflation is more persistent, they have begun to use “forward guidance” to tell the market that tighter policy is on the horizon.
Bernanke said that while current inflation is often compared to the hyperinflation of the late 1970s and early 1980s, it is different from the last high inflation. What’s more, the current Fed’s credibility as an inflation fighter is higher, and public support for raising interest rates is higher. “While we’re seeing the impact of Fed tightening on the market, there’s a lot of support for the Fed’s current policy. We’re going to see the impact on house prices, etc. Those are some of the things where things are better now than they were in the 1970s. We’re going from the 70s Learned a lot over the years.”
In recent days, the old leaders of the Federal Reserve have frequently spoken out, believing that the Fed is acting too late. William Dudley, who chaired the New York Fed from 2009 to 2018, said there is little chance that Fed officials will achieve a soft landing this cycle because every time they have had to push up unemployment in the past has ended in a recession.
Jeffrey Lacker, who was president of the Richmond Fed from 2004 to 2017, and Charles Plosser, who was president of the Philadelphia Fed from 2006 to 2015, shared a similar view.
All three former Fed officials believe the Fed will likely need to raise interest rates to levels not seen in years. They also agreed that when the Fed announced in 2020 that it would not act to curb inflation, it had already planted the scourge of the current situation.
Aggressive rate hikes have now been compelled to move far behind the curve last summer because the Fed viewed inflation as temporary and did not tighten policy.
Financial blog Zerohedge commented that under the Taylor rule, the federal funds rate should exceed 11%, rather than the current 1% or so. Taylor’s rule is a formula that predicts or guides how a central bank should change interest rates in response to changes in the economy. The Fed under Powell missed the window of opportunity to tighten policy rates, often with a hard landing due to policy mistakes.
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