With Inflation at its highest level in 40 yearsThe Federal Reserve Under arms to tame it without causing a recession President Jerome Powell It faces widespread criticism for waiting too long to raise interest rates in the wake of the COVID-19 pandemic.
The tightening plan, which this month included a half-point rate hike for the first time in two decades, has turbulent financial markets and raised investor uncertainty about whether it can steer the US economy into a so-called soft landing.
Former Federal Reserve Chairman Ben Bernanke is no stranger to the financial turmoil that weathered the 2008 financial crisis when the United States and the global financial system teetered on the brink of collapse.
On Monday, he will participate in a rare question-and-answer session convened by the Brookings Institution at 11:00 a.m. ET that will be broadcast live on FoxBusiness.com.
In an excerpt from his new book titled Monetary Policy for the 21st Century: The Federal Reserve from Hyperinflation to COVID-19, It delves into the role of the Federal Reserve and the challenges the central bank faces in times of crisis as we have seen over the past three years.
On January 29, 2020, Jay Powell quickly stepped onto the podium to begin the first press conference in his third year as Federal Reserve Chairman. He opened a white file, looked up briefly to welcome the assembled reporters, and then looked down to read his prepared statement. His demeanor was modest, almost sad. But his message was upbeat: The US economy entered its eleventh year of record expansion, unemployment remains at its lowest level in half a century, and people in low-paid jobs have seen wage gains after years of stagnation. The trade tensions that have plagued financial markets over the past two years have abated and global growth appears to be stabilizing.
In passing, he referred to “the uncertainties” affecting the economic outlook, “including those posed by the novel coronavirus.” A follow-up question about the virus, from CNN’s Donna Burak, didn’t come until 21 minutes into the 54-minute press conference. At that point, only a few cases had been reported outside of China. Powell cautiously acknowledged that the virus was a “very serious issue” that could cause “some disruption to activity in China and possibly globally.” 2
Five weeks later, on March 3, Powell walked to the same platform and in the same tone of calm read an even darker statement to reporters. He offered his sympathy to people affected by the virus around the world, noted that it has disrupted the economies of many countries, and predicted that measures to contain the virus “will certainly affect economic activity here and abroad for some time.” He said the Fed was cutting interest rates “to help the economy maintain its strength in the face of new risks”. 3 hinted at more to come. The state of the world has changed dramatically – and Fed policy has changed with it.
Between press conferences on January 29 and March 3, the virus evolved from a local problem to a primary global crisis. The number of reported cases of the disease that will be known as COVID-19 has risen from less than 10,000, almost all of them in China, to more than 90,000 worldwide. Italy imposed quarantine on cities in the Lombardy region, and Iran reported an increase in the number of infections. In the United States, the first death from the virus was reported on February 29 – a man in his 50s near Seattle. And US cases and deaths have grown exponentially from there, threatening to flood health care systems in New York City and other hot spots.
Meanwhile, virus fears caused the worst week in US financial markets since the 2007-2009 financial crisis, indicating problems ahead for the economy. The Dow Jones Industrial Average, which hit a record high earlier in the month, fell more than 12 percent during the week ending February 28. And in March, the turmoil spilled over into the bond markets. Sellers of US Treasuries, even ultra-secure, had difficulty finding buyers, who showed little interest in holding anything other than cash. Private credit markets, where businesses, homebuyers and state and local governments borrow, threaten to freeze completely as lenders and investors grapple with the uncertainty caused by the coronavirus.
In fact, the panic attack in the market heralded an economic shock. With businesses and schools closed, either voluntarily or under local government-imposed closures, economic activity has shrunk at an unprecedented rate. In February 2020, after a long recovery from the Great Recession, only 3.5% of the workforce was unemployed. Two months later, in April, the official unemployment rate stood at 14.8%, a shocking increase likely to lessen the damage to the labor market. More than 20 million jobs were lost in April, the largest drop since the data series began in 1939. The National Bureau of Economic Research’s Business Cycle Dating Committee, which governs the timing of recessions and expansions, will later date the start of the recession pandemic to February.
Adapted from Monetary Policy for the 21st Century: The Federal Reserve from Hyperinflation to COVID-19. Copyright © 2022 by Ben S. Bernanke. Used with permission of the publisher, WW Norton & Company, Inc. all rights are save.