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As the U.S. economy continues to emerge from the pandemic, the Federal Reserve is battling the highest inflation in decades.
“I’ve always thought that looking at economic history was the best way to get clues about how to deal with the current situation,” said former Fed Chair Ben Bernanke.
In a wide-ranging interview with “Marketplace” host Kai Ryssdal, Bernanke discussed how the Fed’s understanding of inflation has evolved over time, how much time the Fed has to get inflation under control and his new book, “21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19.”
To read an excerpt from the book, click here. The following is an edited transcript of Bernanke’s conversation with Ryssdal.
Ben Bernanke: I’ve always thought that looking at economic history was the best way to get clues about how to deal with the current situation. When I was Fed chairman dealing with the financial crisis, I tried to use my work that I’d done on the Great Depression about trying to figure out what things to avoid, what to do and, by the same token, you know, there are differences and similarities with the Great Inflation of the ’70s and the current situation. There are also other episodes that probably bear on this current situation. So I think it’s important to look back at history.
Kai Ryssdal: One of the things that has become clear, and in talking to Chair [Jerome] Powell and others and you in the past, is the difficulty of the decision-making in real time. And you see that a lot in this book, the challenges of reading the signals. And I want you to help us understand how history helps you make those decisions.
Bernanke: Well, sometimes it doesn’t. I think that, I think the pandemic, for example, was a pretty unique event. And that reading the signals on the labor markets and on inflation have been very difficult for the Fed because the pandemic has sort of scrambled things in many different ways. But broadly speaking, if you look back at how past chairs — Alan Greenspan and Paul Volcker and others — approached these problems and what they looked at and how they thought about it, it helps you understand, you know, what the issues are and how to make better policy.
Ryssdal: So let’s go back, actually, to the Great Inflation, the leadup to it — Chair [Arthur] Burns and others at that time who didn’t get it right. What did they miss that, in retrospect, you as a student of the history of economic policy, what did they miss that they should have seen?
Bernanke: Well, there are a number of things. The first was that the Fed was not as independent as it should have been. Both Arthur Burns and his predecessor, William McChesney Martin, were bullied by the president, and Arthur Burns in particular was practically a member of the administration.
Ryssdal: The [Richard] Nixon administration, just to frame it for people.
Bernanke: Many people think that [Burns] went easy on monetary policy in 1972 so Nixon could get reelected. The other part of it was, one part of it is that I think Burns had a rather different view of inflation and the inflation process than we do today. For example, he believed that inflation was caused by what they call cost-push — that is, large companies and large unions raising prices and wages because they had that market power and not because of the factors on the demand side, things that we look at today. And because of that, and because he felt that the Fed was unable really to conquer those forces, he did not put the Fed in the forefront of attacking inflation. To the contrary, he tried to find alternative approaches, like wage-price controls, for example. So the Federal Reserve never gained the credibility they would have to have, and which it would later get, to deal with the inflation of the ’70s.
Ryssdal: I want to dig into credibility a little bit. Because for years, the Fed has undershot its inflation target and has been, you know, there have been many slings and arrows cast at the Fed, as you all know. Does that miss, I guess, impact its credibility? Now, I mean, clearly you believe the Fed still has credibility. But I guess I wonder why you think that.
Bernanke: Well, to put it in context, the Fed has undershot its 2% inflation target, but usually by just a few tenths of a point. I mean, inflation was around 1.6%, 1.7%, something like that for a long time. That’s quite different from being far, far from the target. The other problem was that many other central banks faced the same problem, was that after the early 2000s, interest rates generally were very low. And the Fed didn’t have much space to cut rates because it hit zero. It was in response to that problem that the Fed changed its framework and adopted this average-inflation-targeting approach that it put in place in 2020.
Ryssdal: Right, which is, to be clear, you know — I’m going to paraphrase here — 2% plus or minus, give or take a little bit.
Bernanke: The idea being that if you can get inflation above 2% for a while, so that on average, inflation is at 2, then people will begin to expect inflation to be around 2, and that, in turn again, will help build the Fed’s credibility and help control inflation expectations, so the Fed will have less difficulty getting inflation back to the target over time.
Ryssdal: Help me understand why inflation expectations matter. You hear that so much now from Fed officials and from economists. Why?
Bernanke: Well, they matter because if people don’t expect inflation to return to normal, it affects their behavior. For example, if firms, businesses, think inflation — including the costs of their inputs and their workers — are going to continue to rise year after year, they’re going to pass that through into price increases and be confident that they can continue to raise prices. And meanwhile, workers, thinking that inflation is going to be high, will say, “Look, as in the ’70s, you know, we need a cost-of-living adjustment. We need to have an automatic raise.” And so that so-called wage-price spiral can be self-fulfilling, and it’s very hard to break. One of the other differences between the Volcker period and/or the Great Inflation and now is that inflation expectations in the ’70s were all over the place. Nobody really knew what inflation was going to do. They knew it was going to be very volatile, but they didn’t have any real confidence, and that, in turn, made the economy less efficient.
Ryssdal: This is perhaps an unanswerable question, but how long do you suppose the Fed has before inflation expectations get out of control?
Bernanke: Well, they’re going to have to watch very carefully. I don’t have an exact answer for you, but clearly they want to see inflation moving downward at a reasonable pace. One thing that’s made their job more difficult is that on top of everything else we’ve had recently, some big increases in commodity prices, such as oil prices and food prices. And people see gasoline prices and grocery store prices every week, and that is going to, you know, over time, that is going to seep into their views about how they think inflation is going to evolve. So we don’t know how much time the Fed has. I mean, I think if we don’t see progress, then inflation expectations are going to start to become, as they say, unanchored — which would create a very strong reaction from the Fed because their credibility is very important to them.
Ryssdal: Could you define “progress” [as in] if we don’t see some progress in inflation coming down?
Bernanke: Well, you know, the Fed’s guess — and I think it’s a reasonable guess — is that core [personal consumption expenditures, or PCE] inflation — which is the inflation rate that they target at 2%, which is currently a little over 5 — that they’ll get that down to around 4 by the end of the year, something like that. And if, in addition to that, we see some stabilization in commodity prices, then inflation will come down over the next six to eight months — not all the way back to target, but in a way that people can see that things are moving in the right direction.
Ryssdal: Sorry, random personal interjection. You are retired now. Doing whatever you want to do in retirement. How closely do you follow core PCE and all the twists and turns? Are you still plugged in? Or do you go, “I don’t have to worry”?
Bernanke: No, I used to joke that one of the advantages of being an ex-chairman is I could read the newspaper and say, “Gee, that looks like a serious problem. I hope somebody does something about that.” So I don’t have the responsibility, which is obviously a relief. I do follow it very closely, but obviously, I don’t have 300 Ph.D. economists to answer every question I might have in tremendous detail, so I have to do my best I can on my own.
Ryssdal: You mentioned that you’re relieved not to have the responsibility and I asked chair Powell this the other day, something about whether he was frustrated that he can’t finetune this economy, that the fed’s instruments are blunt tools. In retrospect, right, looking back at your time during the financial crisis, what was your frustration level?
Bernanke: Well, it was very frustrating that we were unable to get the recovery from the Great Recession to be more rapid than it was. It took, I think, in retrospect, a very long time and I think there were a number of reasons for that, putting aside, you know, mistakes that the Fed made. One was the zero bound on interest rates. The fact that once interest rates were at zero — and we cut them to zero in 2008, and they stayed there for four years — that our tools were much more uncertain and limited. The other thing was the tremendous difference between the way the Congress has responded to this crisis and the way they responded to the financial crisis. In dollar terms, if you put together the Trump programs and the Biden programs, fiscal spending to respond to the pandemic has been something like five or six times bigger than the whole fiscal response that Barack Obama signed in, I think February of 2009. So as we were looking at the recovery, the government, the federal government was choosing austerity — raising taxes, cutting spending. It was a bad moment and I said so at the time. So that was frustrating as well.
Ryssdal: Do you think — sorry, just to riff off the pandemic relief that has been coming — do you think all of that fiscal relief contributed, in some way, to the inflation we’re seeing today?
Bernanke: Well, it certainly did. That doesn’t mean it was the wrong policy. The policy was intended, primarily, as relief, the same way that whenever there’s a hurricane, Congress quickly passes a bill to send money to the affected area. But I think it’s also true that from a demand-side Keynesian perspective that all of this money — the 5 trillion or whatever it was — might not have been inflationary in a more normal world. But on top of that, we had a pandemic, which was constraining the ability of the economy to supply the goods and services that people wanted. And so with strong demand and limited supply, you know, econ 101 tells you the prices are going to go up.
Ryssdal: One of the ways that you and Chair Yellen and now Chair Powell have changed the Fed is in your communication strategy. And chair Powell has been explicit about this, right? I mean, you saw his last meeting. He said, I want to talk “directly to the American people.” How critical do you think it is that the Fed explain itself to the American public — most of which, on a Fed day when, you know, the statement comes out, are like, “What?”
Bernanke: I think is very important. As an academic, before I came to Washington, I wrote a lot about inflation targets and other methods of trying to provide accountability and an explanation. And originally, I was particularly interested in making sure the markets understood what the Fed was doing. But as I led the Fed and particularly as we went through this very difficult period of the financial crisis, it became extremely clear to me that it was important not just to talk to the bond market, but to talk to the broader American public. The reason for that is that it became obvious during that period that the Federal Reserve was an institution that wielded very great power. It was led by people who had been appointed and confirmed but were not elected and so the legitimacy of the Fed depended, I thought, on getting the American people to understand what we were doing, why we were doing it and why it was in the interest of the broader public. You know, I instituted the press conference, but I think I do want to say that Jay Powell has taken it to another level and I do think that’s one of the most important contributions that he’s made to the Fed.
Ryssdal: Back to the book for a second. You say, about 21st-century monetary policy, which is the title of his book, it’s been defined by “remarkable innovation and change.” That is not a phrase that comes to mind when you’re thinking about the Fed, which is 100 and something years old. Give me some for instances.
Bernanke: Oh, well, let’s think about monetary policy, for example. Compare today to just 2000, the beginning of the 21st century. [In] 2000 ,we’d never heard of quantitative easing, we’d never heard of elaborate structured forward guidance, that is, talking about where rates are gonna go in the future. We didn’t have press conferences. And then on the financial stability side, which is equally important, think about what Powell did in March of 2020, during the financial crisis to lend money as a lender of last resort, not just to banks, but to all financial institutions. Those were all things that even Alan Greenspan would have said, “Oh, my gosh, this is a really big change in how the Fed operates.”
Ryssdal: I’m gonna guess by your tone here, you approve of the steps Chair Powell took at the beginning of the pandemic.
Bernanke: I think the March 2020 response to that financial crisis was extremely well done. It built on what we did in 2008, but it was very quickly administered, and he added a variety of other tools in addressing that problem. So I think, yes, that was very successful episode. The main thing to say about it, though, is that it showed also that financial regulatory reform is not complete. You know, it’s not something we want to happen that the Fed every 10 years has to come in and massively intervene. So in that respect, it was a wake-up call, but in terms of the Fed’s response, I think it was quite constructive. The CBO, for example, said that in 2020, they expected GDP growth to be minus 6%. And it ended up being minus 2.5%. And the difference was largely the Fed’s actions.
Ryssdal: So let me ask you that just as a way to wrap it up. You know, you talk about how blunt the Fed’s instruments are. Powell talks about it all the time, I’m sure we can find Chair Yellen saying it. But you’ve just recited a bunch of tools the Fed kind of created and did in a time of crisis. Is it unreasonable for the public to expect that, you all being smart economists, can figure out a way to more acutely fix things like inflation, other than just “Oh, my goodness, all we’ve got is the federal funds rate and the balance sheet and forward guidance?”
Bernanke: Well, the Fed can be creative, but it has to stay within its legal powers and within the remit that Congress has given it. So it can’t do much, frankly, and unfortunately about say, big increases in oil prices globally or big increases in food prices. It can’t fix supply chains or eliminate COVID. The Fed has got powerful tools in one area, which is that it can cool demand, which in turn will take some of the pressure off inflation. And as a result, how much inflation comes down over the next year or two, it’s going to depend partly on the Fed’s policies and how aggressive they are. It’s also gonna depend on a bunch of things that the Fed and the government in general just don’t really control, like oil prices and like supply chains.
Ryssdal: Do you miss it at all, being in the mix?
Bernanke: Well, I talk to people in the government periodically just to be a sounding board.
Ryssdal: Do you talk to Chair Powell?
Bernanke: I do, occasionally. I think maybe it’s just a courtesy on his part. But I have great confidence — I had great confidence in Janet Yellen, who was my vice-chair and who I’ve known all my professional career. I know Jay Powell quite well, he was on my board. He and another [Fed] Governor used to come down to my office on Saturday mornings, and we just talked about monetary policy, because as a lawyer he was trying to really educate himself at that time. So I think he’s done a really good job of bringing himself up to speed on monetary policy, but he also has, you know, some of the lawyerly skills of our being able to argue and explain and communicate, which I think he’s used very well.
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