Former US Federal Reserve chairman Ben Bernanke said the central bank’s current leaders were too slow to react to surging US inflation and, as a result, faces a period of stagflation — a combination of stagnant growth and high inflation.
“The forward guidance, I think overall, on the margin, slowed the response of the Fed to the inflation problem,” Bernanke said in an interview broadcast on CNBC on Monday. “I think, in retrospect, yes, it was a mistake and I think they agree it was a mistake.”
Fed Chairman Jerome Powell and his colleagues chose to respond gradually to surging inflation because they did not want to shock the markets with a repeat of the so-called taper tantrum in 2013, when US Treasury yields surged suddenly under his leadership, Bernanke said.
At the same time, he warned the outcome of such a slow response was going to be a poor economic performance.
“Even under the benign scenario, we should have a slowing economy,” Bernanke told the New York Times separately.
“And inflation’s still too high, but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high,” he predicted. “So you could call that stagflation.”
It is highly unusual for a former Fed chair to criticize a successor; recent chairs Alan Greenspan and Janet Yellen have seemed to go out of their way to avoid criticism. Bernanke’s comments were notable as an exception, albeit carefully worded to not be especially harsh.
Bernanke made his comments as part of media appearances before the publication of a new book, 21st Century Monetary Policy.
Separately, Elon Musk said that the US economy was “probably” in a recession — a judgement at odds with economists and available data — and cautioned companies to watch costs and cash flows.
“These things pass and then there will be boom times again,” Musk told the All-In Summit in Miami Beach, according to a livestreamed video of his remarks posted by a Twitter user. “It’ll probably be some tough going for, I don’t know, a year, maybe 12 to18 months.”
Recession fears have been growing recently as the Fed tightens monetary policy to help cool down inflation that is running near its hottest pace since the early 1980s.
The Fed increased rates by a half point earlier this month, the largest single hike since 2000, and Powell said similar moves were on the table for the next two meetings.
Officials also announced they would start shrinking their US$9 trillion balance sheet from June 1 at a pace that would step up quickly to US$95 billion a month.
Still, odds of a downturn in the coming year currently stand at 30 percent, according to the latest Bloomberg monthly survey of economists.
While the US economy shrank an annualized 1.4 percent in the first quarter, the weakness was primarily due to a record trade deficit. Measures of demand — consumer spending and business investment in equipment — actually quickened at the start of this year.
The Federal Reserve Bank of Atlanta’s GDPNow estimate currently has second-quarter GDP rising at a 1.8 percent pace.
Musk, the CEO of Tesla Inc and SpaceX, made the comments on the economy and politics as part of a wide-ranging video appearance at the technology conference.
He suggested that recessions are not necessarily a bad thing, adding that he has been through a few of them in his time at public companies.
“What tends to happen is, if you have a boom that goes on for too long, you get misallocation of capital — it starts raining money on fools, basically,” he said.
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