Economy

Bernanke says the Fed's slow response to inflation 'was a mistake'

Key Points
  • Former Fed Chair Ben Bernanke said the central bank erred in waiting to address inflation.
  • "One of the reasons was that they wanted not to shock the market," he told CNBC's Andrew Ross Sorkin.
  • Bernanke spoke a day ahead of his latest book release, which addresses Federal Reserve policy moves during the 21st century.
VIDEO5:2505:25
The Fed's delayed inflation response was a mistake, says former Chair Ben Bernanke

Former Federal Reserve Chair Ben Bernanke said the central bank erred in waiting to address an inflation problem that has turned into the worst episode in U.S. financial history since the early 1980s.

Bernanke, who guided the Fed through the financial crisis that exploded in 2008 and presided over unprecedented monetary policy expansion, told CNBC that the issue of when action should have been taken to tame inflation is "complicated."

"The question is why did they delay that. ... Why did they delay their response? I think in retrospect, yes, it was a mistake," he told CNBC's Andrew Ross Sorkin in an interview that aired during Monday's "Squawk Box" show. "And I think they agree it was a mistake."

Like the Bernanke-era Fed, the Jerome Powell-led central bank was called on to take aggressive action when the Covid pandemic hit in March 2020. Much of the response was patterned after the financial crisis moves, but to an even larger degree.

It kept that historically loose policy in place well after the economy recovered from the crisis.

Now, the Fed is tightening policy with rate hikes and a reduction of its bond holdings that will start in June. However, the Fed is facing criticism that it waited too long to pull back and now confronts inflation running at an 8.3% annual pace.

Bernanke said he understands why the Powell-led Fed waited.

"One of the reasons was that they wanted not to shock the market," he said. "Jay Powell was on my board during the Taper Tantrum in 2013, which was a very unpleasant experience. He wanted to avoid that kind of thing by giving people as much warning as possible. And so that gradualism was one of several reasons why the Fed didn't respond more quickly to the inflationary pressure in the middle of 2021."

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In late summer of 2020, the Fed changed its policy framework to indicate that it would allow inflation to run hotter than normal in the interest of assuring a complete and inclusive jobs recovery.

When inflation began running higher than the 2% target in the spring of 2021, policymakers said they expected it to be "transitory" due to pandemic-specific factors that would abate. In recent days, several Fed officials have defended their response, saying that when it became clearer that inflation was more persistent, they began using "forward guidance" to tell the market that tighter policy was coming.

One thing the Fed has going for it is that while the current inflation run is drawing comparisons to the hyperinflation of the late 1970s and early '80s, it is different from the last time price increases were this high, Bernanke added.

What's more, the current central bank has more credibility as an inflation fighter, and there's more public support for rate hikes.

"There's a lot of support for the fact that the Fed is tightening now, even though obviously we see the effects in markets," Bernanke said. "You know, we'll see the effects in house prices, etc. So those are some ways in which the current situation I think is better because we learned a lot from the '70s."

Bernanke's new book is "21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19" and will be released officially Tuesday.

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