Benjamin Bernanke was Chairman of the Federal Reserve during and after the 2008 financial crisis. Under his watch, the Fed cut the Fed funds rate, invented Quantitative Easing and loosened monetary policy as never before, preventing the collapse of the financial markets. The Fed pumps money into the banks and the banks didn’t lend much to consumers during the Great Recession. Congress did not increase fiscal stimulus so consumer price inflation remained low.
Mr. Bernanke has written an article that compares and contrasts the inflation of the 1970s with today’s inflation. He describes how Federal Reserve chairmen caved to political pressure to keep monetary policy loose. Bernanke tactfully didn’t mention that Fed Chair Jerome Powell himself caved to political pressure to reverse the Fed’s program of raising the ultra-low fed funds rate in 2018.
Today, Bernanke is telling Powell to raise rates in order to establish and maintain the Fed’s credibility as an inflation fighter.
https://www.nytimes.com/2022/06/14/opinion/inflation-stagfla…
**Inflation Isn’t Going to Bring Back the 1970s**
**By Ben S. Bernanke, The New York Times, June 14, 2022**
**....<huge snip describing Fed policy in the 1970s with high inflation and 4 recessions>...**
**Are we in danger of repeating that experience?**
**The short answer: almost certainly not....**
**Besides the Fed’s greater independence, a key difference from the ’60s and ’70s is that the Fed’s views on both the sources of inflation and its own responsibility to control the pace of price increases have changed markedly. ...**
**The Fed today recognizes that it must take the leading role in controlling inflation, and it has the tools and sufficient political independence to do so. After a delay caused by a misdiagnosis of the economy in 2021, the Fed has accordingly turned to tightening monetary policy, ending its pandemic-era bond purchases, announcing plans to shrink its securities holdings and raising short-term interest rates....**
**None of this implies that the Fed’s job will be easy. The degree to which the central bank will have to tighten monetary policy to control our currently high inflation, and the associated risk of an economic slowdown or recession, depends on several factors: how quickly the supply-side problems (high oil prices, supply-chain snarls) subside, how aggregate spending reacts to the tighter financial conditions engineered by the Fed and whether the Fed retains its credibility as an inflation fighter even if inflation takes a while to subside.... The Fed’s credibility will help ensure that the Great Inflation will not be repeated, and Mr. Powell and his colleagues will put a high priority on keeping that credibility intact.** [end quote]
In plain English, Bernanke is telling Powell, “The Fed’s credibility is the most important thing. If the Fed loses its cred, inflation will worsen. Raise rates and hang on. Inflation will take a long time to subside but you must not waver.”
In plain English, Bernanke is telling investors, “Taming inflation will be a marathon, not a sprint. Prepare for higher interest rates that will last a long time.”
Wendy