The Federal Reserve Board seems to have succeeded where other central banks failed. At least in convincing the market to become more dovish in the next few years, former Federal Reserve Board chairman Ben Bernanke said Sunday.
“As far as we know, FRB’s forward guidance has been quite effective in terms of both changes in its framework and commitment,” Bernanke said. Under discussion about economic policy during the coronavirus pandemic At the annual meeting of the American Economic Association.
Central banks often face the challenge of being confident about policy decisions that haven’t been made over the years, according to Bernanke, and the Fed seems to have achieved this goal.
In August, the Fed announced a new policy framework, stating that it would fall below the 2% inflation target for years and then try to exceed it.
The Federal Reserve Board also said it would no longer preemptively raise benchmark rates to avoid expected inflation, which was a standard Federal Reserve policy dating back to the 1950s. Under the new commitment, the Fed will not move until inflation actually rises.
A survey of primary dealers conducted by the Federal Reserve Bank of New York Bernanke widely believes that when the Fed raises benchmark rates from zero, market participants have moved in the dovish direction, showing higher inflation and lower unemployment.
Markets are often proactive and bond yields rise when the economy is slowly recovering from a severe recession. However, this surge in long-term bond yields can stall growth. This dynamics was a constant struggle for Bernake in the wake of the 2008 financial crisis.
Bernanke said today’s market expectations are much more dovish than after the 2008 financial crisis.
“In financial markets, interest rates won’t rise as much as four years,” he said.
Bernanke said the Fed’s monetary policy has had a beneficial effect since the pandemic began to cause economic turmoil in March.
The economic recovery proved to be faster than expected, he said. In June, the Fed predicted 2020 GDP growth of minus 6.5% year-on-year. Currently, the Fed is expected to be less than minus 2%.
In addition, the sector affected by low interest rates drove the recovery.
Bernanke said the Fed also succeeded in recovering the market following a “short-term, rapid financial crisis” in early March when the economic impact of the upcoming pandemic was understood.
Bernanke said the Fed’s main street lending facility was a notable exception and was not very successful. The alternative “financing for lending” approach adopted by many foreign central banks seemed to be more successful. These plans provide very cheap funding for marginal lending by banks.
“These programs have been very successful in withdrawing money from the door, especially in Europe,” he said.
According to Bernanke, the federal government has succeeded in persuading the market and will become more dovish in the future.
http://www.marketwatch.com/news/story.asp?guid=%7B21005575-02D4-D4B5-4572-D1C74392276F%7D&siteid=rss&rss=1 According to Bernanke, the federal government has succeeded in persuading the market and will become more dovish in the future.