The Federal Reserve seems to have succeeded where other central banks have failed – at least in markets sure to be more likely in the coming years, Fed vice-chairman Ben Benanke said Sunday.
“As far as we can tell, the Fed’s progressive leadership – both in terms of its framework change and its commitments – has been very effective,” said Bernanke, in a debate on economic policy at the time. the pandemic coronavirus at the American Society of Economics Annual Meeting.
Central banks are often challenged to be credible about policy decisions that will not be made for years, but the Fed seems to have achieved this goal, Bernanke said.
In August, the Fed announced a new policy framework, saying it will try to exceed its 2% inflation target, after years of exceeding that target.
The Fed also said it would no longer walk out of its benchmark flat rate to keep inflation expected, which was Fed’s standard policy dating back to the 1950s. Under the new commitment, the Fed will not move until it sees inflation rise.
Surveys of major retailers conducted by New York Fed reveal that market participants generally believe that the Fed has moved in a dovish direction and that inflation will be higher and inflation lower wages when the Fed raises its benchmark level to zero, Bernanke noted.
As the economy gradually recovers from a deep recession, markets often look ahead and bond yields rise. But this spike in long-term bond yields can stop growth. This dynamism was an ongoing struggle for Bernake during the 2008 financial crisis.
Market expectations today are much more bleak than they were after the 2008 financial crisis, Bernanke noted.
“Financial markets have not seen rates rise for something like four years,” he said.
Bernanke said Fed financial policy has had beneficial effects since the pandemic began wreaking havoc on the economy in March.
The economic recovery has been faster than expected, he said. In June, 2020 GDP growth would be expected at minus-6.5% per annum. Now, the Fed expects it to be less than minus-2%.
In addition, the regions with low interest rates are affected by recovery.
Bernanke said the Fed had also been successful in reviving markets in the wake of the “short, sharp financial crisis” in early March when the economic impact of the pandemic was realized.
Bernanke said Fed Main Street’s loan facility was very special and less successful. The “loan for financing” alternative adopted by many foreign central banks seemed more successful. These plans provide very cheap financing for any margin lending by banks.
“These programs, especially in Europe, have been very successful in getting money out the door,” he said.