The Federal Reserve appears to have succeeded where other central banks have failed – at least to convince markets that it will be more accommodating in the years to come, former Fed Chairman Ben Bernanke said on Sunday.
“As far as we can tell, the Fed’s forecast – both in terms of changing its framework and in terms of commitments – has been quite effective,” Bernanke said, during a policy discussion. economic during the American-style coronavirus pandemic. Annual meeting of the Economics Association.
Central banks are often faced with the challenge of being credible on policy decisions that won’t be made for years, but the Fed appears to have achieved that goal, Bernanke said.
In August, the Fed announced a new policy framework, saying it will try to beat its 2% inflation target, after years of falling short of that target.
The Fed also said it would no longer preemptively raise its benchmark interest rate to ward off expected inflation, which had been standard Fed policy since the 1950s. Under the new commitment, the Fed The Fed won’t budge until it sees inflation rise.
Surveys conducted by the New York Fed of primary dealers indicate that market participants generally believe that the Fed has moved in an accommodative direction and that inflation will be higher and unemployment will be lower when the Fed raises its rate. benchmark of zero, noted Bernanke.
When the economy is slowly recovering from a deep recession, markets often look ahead and bond yields rise. But this spike in long-term bond yields may cause growth to slow. This dynamic has been a constant struggle for Bernake in the aftermath of the 2008 financial crisis.
Market expectations are much more accommodating today than after the 2008 financial crisis, noted Bernanke.
“Financial markets don’t see rates going up for about four years,” he said.
Bernanke said the Fed’s monetary policy had had beneficial effects since the pandemic began to wreak havoc on the economy in March.
The economic recovery has proven to be faster than expected, he noted. In June, the Fed forecast GDP growth in 2020 to be minus 6.5% on an annual basis. Now the Fed expects it to be below minus-2%.
In addition, sectors affected by low interest rates led the recovery.
Bernanke said the Fed was also successful in restoring markets following the “brief and acute financial crisis” in early March, when the economic impact of the coming pandemic was understood.
Bernanke said the Fed’s Main Street loan facility was a notable exception and was less successful. The alternative “loan financing” approach adopted by many foreign central banks appears to be more effective. These plans provide very cheap funding for any marginal loan granted by the banks.
“These programs, especially in Europe, have been very successful in getting money out,” he said.