Bernanke Invokes Friedman's Inflation-Fighting Legacy to Defend Stimulus
Federal Reserve Chairman Ben S. Bernanke invoked the inflation-fighting legacy of the late Nobel laureate economist Milton Friedman and, for the third time in as many days, defended the Fed’s expansion of record stimulus.
Bernanke, speaking yesterday at a conference in Jekyll Island, Georgia, responded to criticism in an opinion article this week by Allan Meltzer, a Fed historian. Meltzer said in the Wall Street Journal that Friedman, who died in 2006 and influenced the thinking of Fed officials such as Bernanke, wouldn’t have supported the central bank’s decision to buy more assets.
“We are doing everything Milton Friedman would have us do,” Bernanke said. “What Milton Friedman would say is that the Federal Reserve is responsible for the stability of nominal aggregates including prices, and that means that particularly with respect to inflation, you don’t want inflation to be too high but you also don’t want it to be too low.”
The Fed chief’s comments extend a defense of the Nov. 3 decision to buy $600 billion of Treasuries through June in a bid to lower unemployment and avert deflation. Officials in Germany, China and Brazil said his plan to pump cash into the banking system will jar other economies and fail to fuel U.S. growth, while U.S. critics including Meltzer say the central bank risks setting off uncontrollable inflation.
Bernanke, 56, chairman since 2006, said in a Washington Post opinion article hours after the decision that the central bank “will take all measures necessary to keep inflation low and stable.” The Fed lowered the benchmark rate almost to zero in December 2008 and carried out a $1.7 trillion first round of asset purchases that ended in March.
Meltzer, a professor at Carnegie Mellon University in Pittsburgh, declined to comment about Bernanke’s remarks.
Yesterday, during a panel discussion, Bernanke spoke alongside his predecessor, Alan Greenspan, and former New York Fed President E. Gerald Corrigan, to an audience including more than a dozen current and former Fed policy makers. Bernanke dismissed the idea the central bank will increase inflation higher than it prefers.
“I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effects on the economy,” Bernanke said. “Our credibility must be maintained,” and “it’s critical for us to maintain inflation at an appropriate level,” he said.
“Our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation which I think we all agree would be a worse outcome,” Bernanke said.
Target Higher Inflation
New York Fed President William Dudley and Chicago Fed President Charles Evans broached the idea in speeches last month that the Fed could target higher-than-normal inflation temporarily as a way of trying to aid growth.
On Nov. 5, Bernanke said to students in Jacksonville, Florida, that the unconventional policy will avert a decline in inflation and spur the U.S. recovery. It has the goal of reducing borrowing costs, adding stimulus and, “we hope, creating a faster recovery and an inflation rate consistent with long-run stability.”
Corrigan, 69, said yesterday that “even in the face of substantial margins of underutilization of human and capital resources, efforts to achieve an upward nudge in today’s very low inflation rate make me somewhat uncomfortable.”
Corrigan was a policy maker under former Fed Chairman Paul Volcker, who raised interest rates as high as 20 percent to beat inflation, pushing the economy into the 1981-82 recession.
Navigate Uncharted Waters
In prepared remarks distributed to attendees, Corrigan said he has a “very high degree of confidence in the Fed’s ability to navigate through these uncharted waters” and that his concern about “low probability contingencies” doesn’t detract from his “admiration and respect for the Fed and its tradition of great leaders past and present.”
The Fed’s preferred gauge for consumer prices, which excludes food and energy costs, rose 1.2 percent in September from a year earlier, the slowest pace since 2001. Fed policy makers have a long-run goal of 1.7 percent to 2 percent inflation that they see as consistent with achieving legislative mandates for maximum employment and stable prices.
“Much more often than not, the Fed has made mistakes in erring on the side of too little restraint and too much inflation,” said Marvin Goodfriend, a former Richmond Fed research director who now works with Meltzer as a professor at Carnegie Mellon University in Pittsburgh.
Now the Fed faces “some more two-sided risks,” and “when you approach price stability, sometimes it is warranted to be worried about too little inflation,” Goodfriend said after the panel discussion.
Bernanke spoke at a conference on Fed history sponsored by the Atlanta Fed and Rutgers University at the site of a secret 1910 meeting in which a senator and several bankers devised a plan which would provide some of the elements of the Federal Reserve Act signed in 1913.
Former Minneapolis Fed President Gary Stern said he would have supported the Fed’s asset purchases.
“I would have voted in favor of it mainly because I think it’s worth a try and might have marginally positive effects on the rate of growth of the economy and unemployment,” Stern said Nov. 5 in a Bloomberg Radio interview at the conference. He retired from the Fed in 2009.
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