ex US Federal Reserve Chairman Ben Bernanke accuses current US central bank leaders of waiting too long to address soaring inflation, warns economy As a result, it faces a period of stagflation for the first time since the 1970s.
“I think in general, forward guidance has somewhat slowed the Fed’s response to inflation,” Bernanke said in an interview with CNBC on Monday. “I think, in retrospect, yes, it was a mistake, and I think they agreed that it was a mistake.”
How the Fed missed its target of soaring inflation
Chairman of the Federal Reserve Jerome Powell and his colleagues initially hypothesized that high inflation is closely related to the COVID-19 pandemic and that prices would stabilize once virus cases began to decline.
But the underlying causes of inflation are manifold, with rising prices stemming from supply chain disruptions, high consumer demand, Russia’s war in Ukraine and trillions of government spending going directly into Americans’ pockets. When inflation didn’t fall with virus cases — once wages started rising rapidly — the Fed was forced to reverse course.
Bernanke, who led the Fed from 2006 to 2013 and steered the economy through the worst of the 2008 financial crisis, said he understood why Powell chose to wait to deal with a spike in inflation, calling the decision “complex.” Fed officials are wary of repeating the “taper tantrum” of 2013, when a mere suggestion by Bernanke to tighten monetary policy sent bond yields soaring, costing holders huge losses.
At the same time, the former Fed chairman said such a slow policy response could lead to poor economic performance.
“Even in a benign scenario, our economy should be slowing,” Bernanke told The New York Times in a separate interview. “And inflation is still too high, but it’s coming down. So there should be a period of sluggish growth in the next year or two, unemployment will rise at least a little bit, inflation is still high. So you could call it stagflation.”
Stagflation is a combination of economic stagnation and high inflation, characterized by soaring consumer prices and high unemployment. The phenomenon ravaged the U.S. economy in the 1970s and early 1980s, as soaring oil prices, rising unemployment and loose monetary policy pushed the consumer price index to 14.8% in 1980, forcing Federal Reserve policymakers to raise interest rates to 10% that year. nearly 20% .
Consumer prices rose 8.3% year over year in April, near a 40-year high and are expected to remain elevated in the coming months. As a result, the Fed is embarking on its most aggressive tightening in decades, raising interest rates by half a percentage point earlier this month and signalling that a similarly-sized hike is feasible at its upcoming meeting.
Fears are growing that the Federal Reserve will trigger a recession, as higher interest rates tend to lead to higher lending rates for consumers and businesses, which can slow economic growth by forcing employers to cut spending. Wall Street firms such as Bank of America, Fannie Mae and Deutsche Bank forecast a downturn in the next two years.
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Powell acknowledged there could be some “pain” from lower inflation and suppressed demand, but he rejected the notion of an impending recession, citing the labor market and strong consumer spending as bright spots in the economy. However, he cautioned that a soft landing — the sweet spot between cooling demand without suppressing it and triggering a recession — is uncertain.
“It’s going to be challenging, it’s not going to be easy. No one here thinks it’s going to be easy. Still, we think there’s a way … to get us there,” Powell said at a time. interview Last week with Marketplace.