Fed has the tools it needs to fight the next recession, Bernanke says

Published: Jan 8, 2020 10:07 a.m. ET


Rate cuts, plus QE and verbal guidance, should give central bank all the ammunition it needs, former Fed chairman says

Author photo


Senior economics reporter
Bloomberg News/Landov
Ben Bernanke, former chairman of the Federal Reserve, spoke to the American Economic Association annual meeting.

SAN DIEGO — The Federal Reserve has all the tools it needs to fight the next recession, its former chairman Ben Bernanke said Saturday.

A former economics professor at Princeton University, Bernanke led the Fed from 2006 until 2014. He used his academic research of the Great Depression to engineer a new monetary policy strategy to revive the economy in the wake of the 2008 financial crisis.

7073彩票注册Specifically, the Bernanke Fed bought trillions of government securities and mortgage-backed assets to push down long-term interest rates after short-term rates got stuck at zero. The Fed then guided the market to understand that the central bank was going to keep rates “lower for longer,” and not raise them at the first sign of an upturn in growth.

7073彩票注册Bernanke is now the president of the American Economic Association. Bernanke argued these tools should be used again to fight the next recession.

Historically, the Fed has lowered its benchmark federal funds rate by 500 basis points to combat a recession.

With that benchmark rate now below 2%, economists worry the Fed won’t have the firepower to offset a serious economic slump.

In his speech, Bernanke argued QE and forward guidance could provide the missing firepower, the equivalent of 300 basis points of easing, for the Fed.

“QE and forward guidance should be part of the standard toolkit going forward,” Bernanke said.

7073彩票注册If he was wrong, the Fed could consider taking additional steps like raising its inflation target above 2%, he said.

But that wasn’t necessary at the moment.

The former Fed chair did advocate that Congress put in place some spending programs that would be triggered automatically if the economy stumbled.

Some recent academic papers have cast doubt on the effectiveness of the Fed’s bond-buying programs under Bernanke.

7073彩票注册The former Fed chairman said he disagreed with these findings, and cited other research that showed QE was successful in lowering long-term interest rates.

QE delivered “significant’ and “persistent” stimulus to the economy, he said.

7073彩票注册Bernanke did part ways with Fed Chairman Jerome Powell on one point.

Powell has leaned strongly against the idea of pushing the fed funds rate into negative territory in the next recession as both the European Central Bank and the Bank of Japan have done.

7073彩票注册Bernanke said he thought it would be wiser for the Fed to be more ambiguous about the subject of negative rates. There are benefits to financial markets if investors believe the central bank might take that step, he said.

Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on 7073彩票注册 @grobb2000.

We Want to Hear from You

7073彩票注册Join the conversation

MarketWatch Partner Center