Prophets

The 'Bernanke Doctrine' Is Played Out

The zero interest-rate policy encouraged the world to take on huge quantities of debt.

Will she change course?

Photographer: Scott Eisen/Bloomberg

Making the rounds Tuesday ahead of the release of the paperback edition of his memoir “The Courage to Act,” former Federal Reserve Chairman Ben Bernanke insisted that it was the working classes, not solely investors, who had benefited from unconventional monetary policy. In a CNBC interview, he commented that “the rich save more than the poor” in response to the assertion that low interest rates had harmed savers.

Odds are that outside his successor at the Fed and peers within the economics community, few would agree with that statement.

Ask any pension-fund manager or life-insurance executive about the efficacy of zero interest-rate policy. They are apt to have a tale of woe. Theyve battled for years to safeguard portfolios against impossible odds given the dearth of fixed-income alternatives that allow them to match their assets and liabilities. They also will tell you zero was an unnecessary target for policy makers to achieve.

In March 2008, as liquidity seized up to the extent that Exxon Mobil Corp. was struggling to access the commercial paper market, Dallas Fed President Richard Fisher warned that slashing the federal funds rate did not address the root problems of “liquidity, solvency and trust.”

Philadelphia Fed President Charles Plosser joined Fisher in dissenting against the majority, which voted to lower the fed funds rate to 2.25 percent. At the time, Fisher and Plosser might not have been privy to what then-New York Fed President Timothy Geithner had named “The Bernanke Doctrine.” The two who pushed back didn’t know they were along for the ride on a preset course.

The doctrine, which is curiously absent from Bernanke’s memoir, had been planned out among the chairman’s closest advisers the previous August at the gathering in Jackson Hole, Wyoming. The game plan required slashing the fed funds rate to zero before embarking upon the quantitative-easing campaign that entailed trillions of dollars of purchases of securities by the Fed.

Investors today are laser-focused on the $4.5-trillion balance sheet that resulted from the Fed’s extraordinary actions. They will be keyed in for any clues as to whether the Open Market Committee statement this week will detail plans to begin unwinding the balance sheet by allowing maturing securities to roll off and not be replaced via reinvestment.

Unless Chair Janet Yellen has a doctrine of her own at work, it is difficult to foresee the statement being near as aggressive as the March FOMC meeting minutes that were released in early April in which “some participants viewed equity prices as quite high relative to standard valuation metrics.” In FedSpeak, a nod to frothy stock prices is code for an aggressive tightening stance.

But since the minutes’ release, the Fed’s preferred measure of inflation, personal consumption expenditures, has fallen below policy makers’ stated 2 percent target. The PCE deflator declined 0.2 percent in March, pulling the year-on-year gain down to 1.8 percent from 2.1 percent in February.

Although there was much fanfare associated with the first inflation print in five years to exceed the Fed’s target, the February PCE report looks to have been a high-water mark for U.S. economic data in general. Job creation has since disappointed, as have retail sales, weighed down by a faltering auto sector.

But even the “soft” data have started to come back down to Earth: Both the ISM manufacturing and consumer confidence surveys came in shy of estimates. Consumers, for their part, are not taking any fliers on the future; at 5.9 percent, the saving rate is the highest since August.

While the markets fully anticipate a June rate hike, the rest of the year remains a question to be settled by the data to come. It is highly premature to conclude that the Fed will be able to continue on its current tightening trajectory, to say nothing of experimenting with shrinking its balance sheet against such a potentially volatile backdrop. That is, unless there is an agenda of which the public has no knowledge.

Any hint at a preordained path should thus be met with skepticism at this juncture. Insistent central bankers who act as if they’re on a mission sometimes are. The problem is that in the current era, these model-driven missions have inflicted more harm than good.

In a note to clients ahead of Bernanke’s CNBC interview, the Lindsey Group’s Peter Boockvar crowned the former Fed head the “King of Debt” due to the massive obligations the zero-interest rate policy encouraged the world to take on over the past 15 years.

“Yes, he saved the world in 2008,” Boockvar wrote, “But he and Greenspan played with the matches in the 2000s.”

Bloomberg Prophets Professionals offering actionable insights on markets, the economy and monetary policy. Contributors may have a stake in the areas they write about.

    To contact the author of this story:
    Danielle DiMartino Booth at Danielle@dimartinobooth.com

    To contact the editor responsible for this story:
    Max Berley at mberley@bloomberg.net

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