Former Federal Reserve Chairman Ben Bernanke said the U.S. central bank’s decision to delay its response to the highest inflation rates in four decades “was a mistake.”
Bernanke, who served two terms as chair of the Federal Reserve during the Bush and Obama administrations, helped guide the country through the 2008 financial crisis—another time in which the central bank played an outsized role in trying to help the economy recover.
But speaking to CNBC on Monday, Bernanke said that while he understands the reasoning behind the Fed’s delayed response, the Jay Powell-led Fed should have acted sooner to help bring down inflation rates that rose as high as 8.5% year-over-year in April.
“Why did they delay their response? I think in retrospect, yes, it was a mistake,” Bernanke told CNBC on Monday. “And I think they agree it was a mistake.”
Bernanke said the Fed avoided taking more immediate action out of fears that it would “shock the market.”
Throughout 2021, while inflation rates were steadily rising, much of the public response from the Fed was based around a belief that the rising rates were “transitory,” or as Powell described it at the time, not enough to “leave a permanent mark in the form of higher inflation.”
It wasn’t until December 2021 that Powell and Treasury Secretary Janet Yellen said it was “time to retire” the transitory label, and began taking more impactful measures to limit the rise.
Since then, the Fed has taken more drastic steps to try to bring down inflation rates, including through two rate hikes that will push mortgage rates, auto rates, credit card interest, and borrowing rates much higher.
“It's not gonna be pleasant,” Powell acknowledged earlier this month.
Under Powell, who was confirmed by the Senate last week for a second term, the Federal Reserve has faced a string of crises due to the coronavirus pandemic-induced economic crash and now the decades-high inflation rates.
According to Bernanke, it's all headed towards a possible scenario in which the U.S. economy could enter a period of “stagflation,” or a combination of economic stagnation and high inflation, coupled with increased unemployment.
“Even under the benign scenario, we should have a slowing economy,” Bernanke told The New York Times on Monday. “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…So you could call that stagflation.”
Bernanke, whose new book is out on Tuesday, also offered his thoughts on the calls for President Biden to forgive the $1.75 trillion in total U.S. student loan debt.
“It would be very unfair to eliminate [all student debt],” Bernanke told The New York Times. “Many of the people who have large amounts of student debt are professionals who are going to go on and make lots of money in their lifetime. So why would we be favoring them over somebody who didn’t go to college, for example?”
In recent months, Biden has reportedly debated instituting widespread student loan forgiveness, while also considering adding income caps that would exclude high earners from student loan relief. The Biden administration has already canceled the most student loan debt of any administration in history, forgiving $16 billion in federal student loans for targeted groups such as disabled borrowers, and students who were defrauded by their institutions.
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