Tags: Bernanke | Fed | rate | policy

Bernanke's Blog: In Defense of Fed's Low Interest-Rate Policy

By    |   Monday, 30 March 2015 10:36 AM

Former Federal Reserve Chairman Ben Bernanke has launched a blog, and his initial posting is chock full of interesting thoughts about interest rates.

He rebuts critics who say that his low-interest rate policy has hurt savers. "The state of the economy, not the Fed, ultimately determines the real rate of return attainable by savers and investors," writes Bernanke, now a distinguished fellow in residence at the Brookings Institution.

"The Fed influences market rates but not in an unconstrained way. If it seeks a healthy economy, then it must try to push market rates toward levels consistent with the underlying equilibrium rate."

Under Bernanke, the central bank cut its federal funds rate target to a record low of zero to 0.25 percent in December 2008, a target that still prevails.

He notes that some congressmen accused him of throwing senior citizens, who are dependent on savings, under the bus.

"I was concerned about those seniors as well," Bernanke explains. "But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed's raising interest rates prematurely would have been exactly the wrong thing to do."

He adds, "Ultimately, the best way to improve the returns attainable by savers was to do what the Fed actually did: keep rates low (closer to the low equilibrium rate), so that the economy could recover and more quickly reach the point of producing healthier investment returns."

Bernanke also responds to a "similarly confused criticism that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates artificially low." And why is that view off base?

"Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by the markets," Bernanke notes. "The Fed's actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere."

Essentially he's saying a weak economy justifies low rates. The economy has only grown about 2.2 percent since the recession ended in 2009.

"The state of the economy, not the Fed, is the ultimate determinant of the sustainable level of real returns," Bernanke points out. "This helps explain why real interest rates are low throughout the industrialized world, not just in the United States."

Meanwhile, in light of the fact that U.S. economic growth totaled only 2.2 percent in the fourth quarter, New York Post reporter Jonathon Trugman borrowed from rock and roll to describe the plight of the Fed now.

"To rework a line from Pink Floyd's 'The Wall,' 'If you don't grow yer economy, you can't have any rate rise. How can you have any rate rise if you don't grow yer economy?'" he writes.

"That's the wall Fed Chairwoman Janet Yellen faces in raising rates in 2015," Trugman notes

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Former Federal Reserve Chairman Ben Bernanke has launched a blog, and his initial posting is chock full of interesting thoughts about interest rates.
Bernanke, Fed, rate, policy
Monday, 30 March 2015 10:36 AM
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