Former Federal Reserve Chair knows how powerful words can be. “When I was at the Federal Reserve, I occasionally observed that monetary policy is 98 percent talk and only two percent action,” he wrote Monday in launching a new blog at the Brookings Institute. “The ability to shape market expectations of future policy through public statements is one of the most powerful tools the Fed has.”
Bernanke no longer has the power of the Fed chairmanship, but his new blog shows he’s willing to use the tools he has now to comment on the economy and defend past policy decisions — this time without some of the restrictions or risks inherent in speaking as the head of the central bank. He might also, occasionally, write about baseball.
“Now that I’m a civilian again, I can once more comment on economic and financial issues without my words being put under the microscope by Fed watchers,” Bernanke wrote, adding that the opinions he expresses will be his own and won’t necessarily reflect the thinking of his former Fed colleagues.
Bernanke’s second blog post asks "Why are interest rates so low?" It provides a detailed and admittedly “textbook-y” answer (Bernanke was, after all, an economics professor before he was the Fed chair). “The bottom line is that the state of the economy, not the Fed, ultimately determines the real rate of return attainable by savers and investors,” Bernanke writes.
As Bloomberg points out, though, portions of the blog post seem to be aimed at Sen. Bob Corker (R-TN) and other critics who accused the Fed of “throwing seniors under the bus” by making the return on their savings so paltry.
It’s a critique Bernanke must have heard often. As Fed chair, he had responded strongly to Corker’s criticisms at a Senate Banking Committee hearing in early 2013. “If we tried to raise interest rates to 3, 4 or 5 percent while the economy is still weak, it could not be sustained,” he said at the time. “The only way to get interest rates up for savers is to get a strong recovery, and the only way to get a strong recovery is to give adequate support to the recovery.” (He also at one point told Corker, “None of the things you said are accurate.”)
Bernanke’s new post elaborates on that answer and pushes back at the idea that the Fed is distorting financial markets by keeping rates “artificially low”:
I was concerned about those seniors as well. But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do. In the weak (but recovering) economy of the past few years, all indications are that the equilibrium real interest rate has been exceptionally low, probably negative. A premature increase in interest rates engineered by the Fed would therefore have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments. The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again…. Ultimately, the best way to improve the returns attainable by savers was to do what the Fed actually did: keep rates low (closer to the low equilibrium rate), so that the economy could recover and more quickly reach the point of producing healthier investment returns.
Bernanke reportedly signed a seven-figure deal with publisher W.W. Norton for a book, expected later this year, that will recount the causes and response to the financial crisis. But his new media platform, plus a newly active Twitter account, will allow him to weigh in more quickly as the Fed gradually looks to unwind its unprecedented steps designed to boost the economy’s recovery from recession.
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