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Ben Bernanke, who served as Federal Reserve Chairman from 2006 to 2016, published an op-ed in the New York Times on Tuesday saying the United States is “almost certainly not” threatened by the economic woes that have plagued the country in from 1966 until 1981. He based this assumption on “the credibility of the Fed”.
The article, titled “Inflation is not going to bring back the 1970s”, claimed that while it “is true that there are some similarities” between the 1970s and today, “there are also critical differences”. .
Regarding these differences, Bernanke argued that in the 1960s and 1970s the Federal Reserve encountered strong political resistance to raising interest rates.
“First, although inflation was very unpopular in the 1960s and 1970s, as it (rightly) is today, back then any inclination of the Federal Reserve to fight inflation by raising interest rates, which could also slow the economy and increase unemployment, has met strong political resistance,” he writes.
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“In contrast, the efforts of current Fed Chairman Jerome Powell and his colleagues to bring down inflation enjoy considerable support from the White House and Congress, at least so far,” did he declare.
In June 2021, Powell argued that inflation would be transitory. At the time, the Fed held policy on hold and said the temporary period of above-trend inflation was unlikely to result in a Fed rate hike until 2023.
Bernanke also wrote that today Federal Reserve officials see themselves as having a greater role to play in reducing inflation than they did in the 1970s. of the Fed, a key difference from the 1960s and 1970s is that the Fed’s views on the sources of inflation and its own responsibility to control the pace of price increases have changed markedly,” he wrote. .
Today the Fed is raising interest rates and selling its balance sheet, which it added $120 billion per month at the height of the pandemic.
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Bernanke noted that inflation didn’t end until the early 1980s when Fed Chairman Paul Volcker raised interest rates to 20%. “Inflation rose through the decade, ending only with the shock treatment applied by the Fed under Paul Volcker in the early 1980s, which led to a deep recession,” he said. -he writes.
The former Fed Chairman asserted, without evidence, that “the lessons learned from the Great American Inflation, both by the Fed and the political leadership, make a repeat of this experiment highly unlikely”, then admitted that the The state of the economy had been misdiagnosed by the Fed in 2021.
“After a delay caused by a misdiagnosis of the economy in 2021, the Fed therefore turned to tightening monetary policy, ending its pandemic-era bond purchases, announcing plans to reduce its holdings of securities and raise short-term interest rates,” he said. .
Powell is encouraged by business leaders and some media to ‘go big’ on inflation.
Bernanke concluded that the credibility of the Fed will be what prevents a return to the 1970s.
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“The Fed’s greater policy independence, its willingness to take responsibility for inflation, and its record of keeping inflation low for nearly four decades after the Great Inflation, make it much more credible on inflation today than its counterpart in the 60s and 70s,” he said. “The credibility of the Fed will help ensure that the Great Inflation does not happen again, and Mr. Powell and his colleagues will place a high priority on keeping that credibility intact.”
Powell and Treasury Secretary Janet Yellen both erroneously declared inflation to be ‘transitional’ in 2021, a claim by the the latter recently admitted that it was a mistake.