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Former Federal Reserve Chair Ben Bernanke said during a Monday interview that the central bank’s delayed inflation response “was a mistake.”
The Fed had dropped its benchmark interest rate to near-zero levels at the outset of COVID-19 and the lockdown-induced recession in a bid to stimulate economic activity. Over the past few months, however, the Fed began aggressively increasing rates in response to rampant inflation pressuring consumers.
Bernanke — who directed the nation’s monetary policy during the 2008 financial crisis — told CNBC that the Fed was too slow in tapering its quantitative easing regime.
“The question is why did they delay that… Why did they delay their response? I think in retrospect, yes, it was a mistake,” he said. “And I think they agree it was a mistake.”
Bernanke, however, said that he sympathizes with current Fed Chair Jerome Powell’s hesitance to raise rates in light of the Fed inducing a market correction in 2013 by floating a cooldown to its stimulus measures.
“One of the reasons was that they wanted not to shock the market,” Bernanke continued. “Jay Powell was on my board during the Taper Tantrum in 2013, which was a very unpleasant experience. He wanted to avoid that kind of thing by giving people as much warning as possible. And so that gradualism was one of several reasons why the Fed didn’t respond more quickly to the inflationary pressure in the middle of 2021.”
Since the high and unpredictable inflation of the 1970s, the Fed has largely earned the public’s trust in managing inflation. For most of the past four decades, inflation has remained relatively stable at or near the Fed’s 2% target; however, with consumer price inflation now at 8.3%, the public wants to see the central bank take decisive action to address price levels.
“There’s a lot of support for the fact that the Fed is tightening now, even though obviously we see the effects in markets,” Bernanke said. “You know, we’ll see the effects in house prices, etc. So those are some ways in which the current situation I think is better because we learned a lot from the ‘70s.”
Indeed, 30-year fixed mortgage rates have surged past 5% — rendering homeownership more expensive for American families. “As Americans contend with historically high inflation, the combination of rising mortgage rates, elevated home prices and tight inventory are making the pursuit of homeownership the most expensive in a generation,” government-backed mortgage company Freddie Mac explained.
Amid the various pressures facing the economy, leading business leaders — including Goldman Sachs Chairman Lloyd Blankfein — are warning that recession risks are “very, very high.”
“If I were running a big company, I would be very prepared for it,” Blankfein said. “If I was a consumer, I’d be prepared for it.”
Nancy Lazar — the chief global economist of investment bank Piper Sandler — told Fox Business last month that the world is in the first part of a “very significant” recession. She explained that economic activity in the United States “will feel very, very weak” as growth slows down from last year’s recovery.
However, Lazar said that the Fed’s higher interest rates would help to curb breakneck inflation in the United States.
“I think we are going to have significant goods deflation,” she continued, pointing to the price of used vehicles as an example. “We’ve seen used cars decline 6% just in a few months.”