A Former Fed Chair Weighs In

There's been plenty of second guessing when it comes to the handling of monetary policy by the Federal Reserve and its chairman, Jerome Powell. Hindsight is 20/20, as they say, and the Fed's actions certainly helped the economy through the worst of the Covid-19 shutdowns. 

But there's also value in figuring out what the Fed missed and how it allowed inflation to reach multi-decade highs. There's arguably no better person to weigh in than another former Fed chair. In a column for Barron's today, Ben Bernanke does just that. 

"Federal Reserve Chair Jerome Powell has a new term in office but no time for a victory lap," Bernanke begins. 

Here are a few other highlights from Bernanke, who has just published a book called 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19. 

·        The Fed's new inflation targets came at the wrong time: "First, the Federal Open Market Committee agreed to try to make up for past undershoots (though not overshoots) of the inflation target. If inflation had been below 2% for a while, as had been the case for much of the past decade, the FOMC would compensate by allowing inflation to run 'moderately above 2% for some time.' ... However, last year and this year, too-high rather than too-low inflation became the FOMC’s main problem....[The new inflation framework] thus may have made policy makers a little more patient about responding to the first signs of inflation. However, the more important reason the FOMC did not act earlier was not the policy framework but the unusual effects of the pandemic, which made the situation more difficult to diagnose."

·        The Fed misunderstood the labor picture: "The unemployment rate in June was 5.9%, well above the prepandemic rate of 3.5%, and millions fewer people held jobs. However, in a pandemic economy, these indicators disguised the labor market’s true strength. Many people had put off returning to work, because they needed to take care of family members, were concerned about getting sick, or were rethinking life priorities. As is now evident in sharply rising wages and the difficulty of employers in finding workers, the labor market over the past year has been more robust than conventional measures suggested."

·        Inflation was never transitory: "The pandemic supply shock was indeed an important source of inflation but it would prove larger and more enduring than the FOMC expected....Inflation expectations over the medium term (the next two to three years) have still not risen much, showing public confidence in the Fed’s resolve, but high inflation has persisted and spread to more sectors of the economy. The Fed’s challenge now is to bring down inflation without inducing a recession—a 'soft landing.'"

You can read Bernanke's full Barron's column here.