Former Federal Reserve Chairman Ben Bernanke said the Fed erred in waiting to address inflation, the worst since the early 1980s.
Bernanke, who led the Fed through the 2008 financial crisis and led an unprecedented expansion of monetary policy, said in an interview with CNBC that the question of when to act to curb inflation is “complicated.”
“The question is why were they so slow? In retrospect, yes, it was a mistake,” he said. “And I’m sure they agreed that it was a mistake.”
Like Bernanke, the Fed, led by Jerome Powell, was called upon to act aggressively when the coronavirus outbreak hit in March 2020. Much of the action follows the pattern taken after the financial crisis, but on a larger scale.
After the U.S. economy recovered from the crisis, the Fed remained on its loosest policy on record. But now, the Fed is tightening policy, raising interest rates and shrinking its balance sheet starting in June. However, it is also facing criticism for waiting so long to exit that it now faces 8.3% annual inflation.
Bernanke said he understands why Ball is waiting, “one of the reasons they don’t want to hit the market.” “During the ‘Taper Tantrum’ in 2013, Ball was on my board, It was a very unpleasant experience. He wanted to avoid it by giving people more warning. So, incrementalism is one of several reasons why the Fed didn’t respond more quickly to inflation pressures in mid-2021. “
In late summer 2020, the Fed changed its policy framework, indicating it would allow higher-than-normal inflation to ensure a full and inclusive employment recovery.
When inflation begins to rise above the 2% target in spring 2021, Fed officials said they expect it to be “temporary” as pandemic-specific factors will abate. And in recent days, several Fed officials have begun to defend those responses, saying they have begun using “forward guidance” to inform markets that tighter policy is on the horizon when inflation is more persistent.
Bernanke added that one thing the Fed is trying to do is that the current pace of inflation, while similar to the hyperinflation of the late 1970s and early 1980s, is not the same as the last high price rises.
An important factor is that the Fed is now seen as an inflation fighter, with more credibility and support for raising interest rates.
“There’s a lot of support for the fact that the Fed is tightening right now, even though you’re clearly seeing the impact on the market,” Bernanke said. “You know, things like housing prices are going to be affected. So I think it’s a little bit better right now. Partly because we learned a lot from the ’70s.”