Fed Chair Bernanke Reflects on His Eventful Fed Tenure

As his eight years as chairman of the Federal Reserve Board of Governors winds down, Ben Bernanke reflected on the central bank's recent history during a recent speech to the American Economic Association.

Bernanke will be succeeded by Janet Yellen, the current vice chair, on February 1. During his talk in Philadelphia, the chairman focused on three topics: the Fed's commitment to transparency and accountability, financial stability and financial reform, and monetary policy.

Transparency and accountability
Bernanke noted that encouraging transparency and accountability was among his main objectives when he became Fed chairman in February 2006. He has long believed increased transparency—and in particular a clearer policy framework—would enhance the predictability and effectiveness of monetary policy.

Under Bernanke's leadership, the policymaking Federal Open Market Committee (FOMC) introduced several communication tools. The FOMC established an explicit inflation goal of 2 percent. In October 2007, the committee introduced a quarterly compilation of FOMC members' projections of key economic indicators such as inflation, the unemployment rate, and gross domestic product growth. Bernanke also began holding quarterly news conferences following FOMC meetings, a first for Fed chairs.

"The increases in policy transparency that were achieved proved valuable during a very difficult period for monetary policy," Bernanke said. "As it happened, during the crisis and its aftermath the Federal Reserve's transparency and accountability proved critical in a quite different sphere—namely, in supporting the institution's democratic legitimacy."

Financial stability
Bernanke recapped the causes of the financial crisis and subsequent efforts to reform the nation's financial regulatory framework. He said he, like many researchers and policymakers, initially based expectations about the macroeconomic effects of the housing bust on those of the bursting of the dot-com bubble a few years earlier.

The impact of the sharp decline in house prices proved to be much worse. That was the case, Bernanke explained, "because unlike the earlier decline in equity prices, it interacted with critical vulnerabilities in the financial system and in government regulation that allowed what were initially moderate aggregate losses to subprime mortgage holders to cascade through the financial system."

The chairman explained that subsequent regulatory reforms have centered on making financial institutions, particularly large ones, better prepared to withstand extreme shocks. Regulation of the "shadow banking" system, which historically was largely unregulated, has also been strengthened, Bernanke added.

Finally, the Fed has adopted a broader, systemic orientation in its approach to supervision and regulation.

Monetary policy
After the financial crisis and recession took hold, Bernanke said a rapid shift in monetary policy was imperative "to counteract the massive economic blow delivered by the crisis." He listed some of the central bank's policy moves, including:

  • reducing the target federal funds rate from 5.25 percent in the summer of 2007 to a range of 0 to 0.25 percent by the end of 2008;
  • introducing enhanced guidance about the likely path of the federal funds rate; and
  • undertaking a series of large-scale asset purchases.

Have the Fed's policy tools worked? Skeptics have pointed out that the economic recovery has been slow, Bernanke acknowledged.

"However," the chairman added, "...the recovery has faced powerful headwinds, suggesting that economic growth might well have been considerably weaker, or even negative, without substantial monetary policy support. For the most part, research supports the conclusion that the combination of forward guidance and large-scale asset purchases has helped promote the recovery."

January 13, 2014