Profile of Ben Bernanke

The Villain - Magazine - The Atlantic

EXCERPTS:

"The critique from the right is that the continued steps to stimulate the economy are both unnecessary, given that the financial crisis has passed, and inflationary. Allan Meltzer, an economist and historian of the Fed, says Bernanke is trying to do what is beyond his powers. “The current high unemployment is not a monetary problem,” Meltzer says, meaning we are past the point where further rate cuts will stimulate hiring. Bernanke has been accused of trying too many remedies with poor odds of success. Possibly, he would plead guilty to this. He has said he admires Franklin Roosevelt’s catchall approach to fighting the Depression, which was less an ideology than an enthusiasm for enthusiasms. The fear now is that the Fed’s balance sheet—that $2.9 trillion—represents kindling for inflation that one day will catch.

The mechanism for ignition would be as follows: Each time the Fed purchases a Treasury security or a mortgage-backed bond, it credits the selling bank with a “reserve” in the same dollar amount. Bank reserves exist as electronic notations, but they represent real money available for loans, and much of that money is sitting idle today, partly because loan demand is weak. If banks, presently, were to lend all their excess reserves, say in the form of cash, the supply of currency would nearly triple overnight, and the price of a burger would, you can bet, do the same. And if the Fed were faced with such an onslaught, and chose to soak up the excess reserves by quickly selling its assets, the deluge would overwhelm markets, send interest rates soaring, and snuff out the recovery.

William Poole discusses the Fed on CNBC's Kudlow Report

William Poole discusses the Fed on CNBC's Kudlow Report

The Federal Reserve's Crony Capitalism | James A. Dorn | Cato Institute: Commentary

The Federal Reserve's Crony Capitalism | James A. Dorn | Cato Institute: Commentary


EXCERPT:

"The Federal Reserve’s decision to release forecasts for short-term interest rates is supposed to clarify monetary policy and reassure the public. By keeping the federal funds rate close to zero for three more years, and switching from shorter to longer-term securities, the Fed hopes to spur investment and growth. The problem is that manipulating interest rates and allocating credit to favored parties fosters crony capitalism, not market liberalism."

COMMENT:

This article covers a lot of ground but it's worth reading. It's a good statement of the objections that can be made to current Fed policy. Keep in mind, though, that it doesn't attempt to give Chairman Bernanke's side of the story.

Press Release--Federal Reserve issues FOMC statement--January 25, 2012

FRB: Press Release--Federal Reserve issues FOMC statement--January 25, 2012

Press Release

Release Date: January 25, 2012
For immediate release

Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.

The Surge in Money Growth: Meaningful or Meaningless? | Bob McTeer's Economic Policy Blog | NCPA.org

The Surge in Money Growth: Meaningful or Meaningless? | Bob McTeer's Economic Policy Blog | NCPA.org

Over the last few months, both M1 and M2 have increased significantly. Does that mean an increase in inflation is near? This short article by Bob McTeer, former president of the Federal Reserve Bank of Dallas, provides a useful discussion of this issue.

Money versus Monetary Base: A Basic Yet Critical Distinction | The Beacon

Money versus Monetary Base: A Basic Yet Critical Distinction | The Beacon

The Continuing Puzzle of the Hyperinflation that Hasn’t Occurred | The Beacon

The Continuing Puzzle of the Hyperinflation that Hasn’t Occurred | The Beacon

Fed Up with the Fed? - Thomas Sowell

EXCERPTS:

"Henry Morgenthau, Secretary of the Treasury under President Franklin D. Roosevelt, said confidentially to fellow Democrats in 1939: "We have tried spending money. We are spending more than we have ever spent before and it does not work."

As for the Federal Reserve today, a headline in the Wall Street Journal of April 25th said, "Fed Searches for Next Step."

That is a big part of the problem. It is not politically possible for either the Federal Reserve or the Obama administration to leave the economy alone and let it recover on its own.

Both are under pressure to "do something." If one thing doesn't work, then they have to try something else. And if that doesn't work, they have to come up with yet another gimmick.

All this constant experimentation by the government makes it more risky for investors to invest or employers to employ, when neither of them knows when the government's rules of the game are going to change again. Whatever the merits or demerits of particular government policies, the uncertainty that such ever- changing policies generate can paralyze an economy today, just as it did back in the days of FDR.

The idea that the federal government has to step in whenever there is a downturn in the economy is an economic dogma that ignores much of the history of the United States.

During the first hundred years of the United States, there was no Federal Reserve. During the first one hundred and fifty years, the federal government did not engage in massive intervention when the economy turned down.

No economic downturn in all those years ever lasted as long as the Great Depression of the 1930s, when both the Federal Reserve and the administrations of Hoover and of FDR intervened.

The myth that has come down to us says that the government had to intervene when there was mass unemployment in the 1930s. But the hard data show that there was no mass unemployment until after the federal government intervened. Yet, once having intervened, it was politically impossible to stop and let the economy recover on its own. That was the fundamental problem then-- and now.

Inflation? Numbers Show Faith in Fed - WSJ.com

EXCERPTS:

"Ben Bernanke held the first postpolicy-meeting news conference by a Federal Reserve chairman in part to bolster confidence that the Fed remained committed to controlling inflation. The words "inflation expectations," or some variation of them, were uttered 21 times in the session.

While investors and the public have concerns about short-term price increases, they appear to have confidence in Mr. Bernanke's ability to control inflation over the long-term. That is crucial to the Fed's success in rebooting the economy, because once higher long-term inflation expectations take root, they can become self-perpetuating, which would mean higher interest rates that could slow growth.
/
Long-term inflation-expectation gauges, from consumers and from the bond market, remain subdued and are little changed from a year ago. They point to inflation that isn't far above the average of the past decade, when inflation was historically low.
One rough gauge of future inflation expectations is the gap between yields on plain-vanilla Treasury bonds and Treasury inflation-protected securities of the same maturity.
TIPS are regularly adjusted for inflation, so this gap in yields, called the break-even inflation rate, shows how much future interest traders are willing to give up for inflation protection, which can be interpreted as the future inflation rate they expect.
The 10-year break-even inflation rate earlier this month surged to 2.66%, the highest since 2006. Amid a host of downbeat economic data in recently, that rate has retreated to less than 2.6%. These numbers are relatively high in the short history of break-even inflation rates, but that period was one of historically low inflation.
/
Many economists, likely including those at the Fed, doubt longer-term inflation pressures can take hold with unemployment still near 9%. The Labor Department on Thursday reported a jump in weekly jobless claims, which have started drifting higher again, a sign of lingering job-market weakness.
"The prospect of a wage-price spiral is much less than the prospect of a sharper slowdown in the economy," said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, N.J.

The Weekend Interview with Charles Plosser: The Fed's Easy Money Skeptic - WSJ.com

This is a good overview of the policy the Fed is currently following, often called QE2 (Quantitative Easing, part 2).

YouTube - Quantitative Easing Explained

This video is very amusing, and, unfortunately, largely [but not entirely] true.

Bernanke Asset Purchases Risk Unleashing 1970s Inflation Genie - Bloomberg

EXCERPTS:

"For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory.

Bernanke next week is likely to preside over a decision to launch another round of large-scale asset purchases after deploying $1.7 trillion to pull the economy out of the financial crisis, comments from policy makers over the past week indicate. This time, with interest rates already near zero, the Fed will be aiming to increase the rate of inflation and reduce the cost of borrowing in real terms. The goal is to unlock consumer spending and jump-start an economy that’s growing too slowly to push unemployment lower.

Estimates for the ultimate size of the asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch Global Research to $2 trillion at Goldman Sachs Group Inc., with economists at both firms agreeing the Fed will likely start by announcing $500 billion after the Nov. 2-3 meeting. The danger is that once the Fed kindles price increases, inflation will be difficult to control.

“By reducing real interest rates and trying to break the psychology of ‘Why spend today when I can buy goods cheaper tomorrow,’ they are hoping to drive growth that would be more commensurate with a pickup in employment,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “The risk is a late 1970s type of scenario where the inflation genie gets out of the bottle.”

The U.S. Treasury Department yesterday sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Fed will be successful in sparking inflation. The securities drew a yield of negative 0.55 percent.

QUESTIONS:
1. How can the yield on a security be negative?
2. What is it about the current economic environment that is causing this yield to be negative right now?

Fed Officials Mull Inflation as a Fix - WSJ.com

EXCERPTS:

"The Federal Reserve spent the past three decades getting inflation low and keeping it there. But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed's informal target.

The rationale is that getting inflation up even temporarily would push 'real' interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more.

Both inside and outside the Fed, though, such an approach is controversial. It could undermine the anti-inflation credibility the Fed won three decades ago by raising interest rates to double-digits to beat back late-1970s price surges. "It's a big mistake," said Allan Meltzer of Carnegie Mellon University, a central bank historian. "Higher inflation is not going to solve our problem. Any gain from that experience would be temporary," adding that the economy would suffer later.

Others warn that pushing inflation higher than the target could create public confusion and risk fueling financial bubbles and market instability. They say Fed policy already is weakening the dollar and as a result prompting a gold and commodity boom. "The Fed is treading upon a mine-laden path that has never been tip-toed through in this country," said Andrew Busch, a currency strategist at BMO Capital Markets.

QUESTION:

If the Fed decides to pursue a policy that will cause more inflation, and people start to expect higher inflation, what effect is this likely to have on nominal interest rates?

What Should the Federal Reserve Do Next? - WSJ.com

A Symposium: What Should the Federal Reserve Do Next? - WSJ.com: "- Sent using Google Toolbar"

Fed Sees Recovery Slowing - WSJ.com

EXCERPTS:

"The Federal Reserve, facing an economic recovery that it termed "more modest" than anticipated, said Tuesday it will stop shrinking its huge portfolio of securities by reinvesting the proceeds of maturing mortgages in U.S. Treasury debt.

The Fed move is largely symbolic and is unlikely to stimulate the economy significantly. But the shift in the management of its portfolio—and an accompanying statement—underscored Fed officials' concern about the vigor of the economic recovery. It also opens the door for bigger purchases of Treasurys or other securities should the economy falter or the risk of deflation grow, though the hurdle for such action remains high.

Downgrading its assessment of the economy, the policy-making Federal Open Market Committee said the recovery "has slowed in recent months," and that the "pace of economic recovery is likely to be more modest in the near term than had been anticipated." The committee repeated its commitment to keep its target for the federal funds rate, at which banks lend to each other overnight, at "exceptionally low levels" for an "extended period."
The Fed noted that high unemployment, modest income growth, lower housing wealth and tight credit were holding back household spending. Meanwhile, lending by banks "has continued to contract," the Fed said, while construction remains weak and employers remain reluctant to increase payrolls.

After cutting short-term interest rates nearly to zero in December 2008, the Fed essentially printed money to expand its portfolio of securities and loans to above $2 trillion, from $800 billion before the global financial crisis. Its purchases of mortgage-backed securities and U.S. Treasury debt, aimed at keeping long-term interest rates down, were discontinued in March. The Fed began talking about an "exit strategy" from the unprecedented steps it took to prevent an even deeper recession.
But on Tuesday, the Fed shifted its stance. It said it would act to keep its securities holdings constant at around $2.054 trillion, the level on Aug. 4. Had the Fed not acted, its mortgage portfolio was set to shrink by $10 billion to $20 billion a month, as mortgages matured or were paid off early. Now, the Fed will reinvest those proceeds in U.S. Treasury securities of between two- and 10-year maturities.
***
The Fed statement noted that "measures of underlying inflation," already low, "have trended lower" lately and are "likely to be subdued for some time." Some Fed officials, as well as private economists, have been warning that the risk of deflation—broadly falling prices and wages across the economy—is rising. A Wall Street Journal survey of economists, mostly from Wall Street, found this week that, by a two-to-one margin, they see deflation as a greater risk over the next three years than inflation.
With interest rates as low as they can go, the Fed has few attractive options to resist deflation. The main one is to print money—electronically—to resume large-scale purchases of securities.

Fed Mulls Symbolic Shift - WSJ.com

EXCERPTS:

Federal Reserve officials will consider a modest but symbolically important change in the management of their massive securities portfolio when they meet next week to ponder an economy that seems to be losing momentum.

The issue: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead. Any change—only four months after the Fed ended its massive bond-buying program—would signal deepening concern about the economic outlook. If the Fed's forecast deteriorates significantly, it could also be a precursor to bigger efforts to pump money into the economy.

Moving to stop the Fed's portfolio from shrinking would prevent monetary policy from slightly tightening in the face of a weakening recovery.

The central bank's $2.3 trillion portfolio has nearly tripled in size since 2007.

The "Mankiw Rule" for monetary policy

EXCERPT:

"There has been a lot of talk lately about whether the Fed will continue raising interest rates or pause for a while. I don't know the answer, but here is one way to think about it.... I estimated the following simple formula for setting the federal funds rate:

Federal funds rate = 8.5 + 1.4 (Core inflation - Unemployment).

The Weekend Interview with Thomas Hoenig: The Fed's Monetary Dissident - WSJ.com

Fed Is Expected to Keep Rates Low for Now - WSJ.com

EXCERPTS:

"Federal Reserve officials are likely to end their policy meeting later this month by reiterating that they expect to keep interest rates low for "an extended period"—despite uneasiness among some policy makers that the words limit the Fed's flexibility as the economy improves.

It is expected that central-bank officials will use speeches and interviews to emphasize that their commitment to hold rates near zero depends largely on how the economy behaves.

More-robust consumer spending has made policy makers more confident that a sustainable recovery has taken hold. With unemployment still high, inflation slowing and stable expectations for future inflation, top officials now see little urgent need to start signaling they are near raising rates. But if the outlook shifts, they say their stance will move....

For the Fed, managing expectations is a delicate task, influenced greatly by the words it chooses. Since March 2009, the Fed has said in each post-meeting statement that it expected the economy's performance to justify keeping short-term rates near zero for "an extended period."

The phrase was chosen to encourage investors to buy long-term bonds, which would keep long-term interest rates low, by signaling the Fed wouldn't move for a long time.

Officials now want to make sure the phrase doesn't handcuff them. Some policy makers have become frustrated that the statement is sometimes interpreted as an ironclad commitment to keep rates low for at least an additional six months. But dropping the closely watched words is unappealing, because it could be misinterpreted as a signal that a rate increase is imminent. So officials are looking for ways to underscore that their plans are conditional.

"Everything depends on how the economy performs," James Bullard, president of the Federal Reserve Bank of St. Louis, said in New York on Thursday. Speaking more broadly last week about how the Fed's exit from easy money policies will unfold, Fed governor Daniel Tarullo said, "it seems to me neither necessary nor advisable to decide upon a single game plan that will be announced in advance and rigidly implemented after a decision is made to raise rates."

Dollar Weakens on Reports of Obama's Potential Fed Picks - WSJ.com

EXCERPT:

"NEW YORK—The dollar weakened broadly amid concerns that U.S. monetary policy may stay loose for a while.

The buck reacted to White House confirmation that Federal Reserve Bank of San Francisco President Janet Yellen is the "top contender" to succeed Donald Kohn as Fed vice chairman. To help the economy recovery, Ms. Yellen favors keeping interest rates low, and the prospect that the Fed's loose monetary policy would stay in force longer pressured the greenback. Mr. Kohn is set to retire in June.

The dollar slumped 0.9% against the U.K. pound and the Swiss franc, while the euro touched $1.3796, the strongest point since Feb. 11. The greenback also plunged to a 19-month low against the Canadian dollar at C$1.0157.

Investors will be watching the Federal Open Market Committee's rate-setting meeting on Tuesday for policy clues in the statement following the rate announcement. The Fed is widely expected to leave rates unchanged near zero.