As a Federal Reserve governor in 2004, Ben Bernanke, now the U.S. central bank's chairman, showed humility — and a sense of humor — in acknowledging a missed call about the path of inflation, transcripts
released on Friday showed.
Bernanke was slow to acknowledge that inflation, after a long period of calm, was beginning to heat up.
He finally threw in the towel at a meeting of the Fed's policysetting Federal Open Market Committee in June 2004, citing "rules of forecasting" borrowed from former Fed colleague Laurence Meyer.
"Rule one, stick with your forecast as long as possible," he said, to laughter. "Rule two, when your forecast becomes untenable, make a new forecast. Rule three, know when to switch from rule one to rule two."
The Fed began raising rates that month, after a long period of worrying about falling prices.
The transcripts also show that Bernanke fully endorsed the gradual rate-raising pace undertaken by the Fed that many now believe allowed a dangerous house price bubble to inflate.
The Fed cut rates to 1 percent in June 2003 to counter the mild recession that had followed the bursting of the tech stock bubble.
Policymakers did not begin to raise rates again until June 2004 and committed to tightening financial conditions at a measured pace.
Rate hikes continued via 17 quarter-point increments through June 2006.
The easy money of that period fueled a house buying and mortgage lending spree that eventually exploded in 2006-2007, driving the United States into a severe financial crisis and the most painful recession in decades.
The Fed's current situation has parallels to that period. The U.S. central bank cut rates to near zero percent in December 2008 and has held them there since then.
Since March of last year it has vowed to hold rates "exceptionally low" for "an extended period," although recently it has stressed that its commitment rests on a weak labor market and negligible inflation pressures and could change if conditions vary.
There are worries, including among some Fed officials, that a long period of low rates could result in a repeat of the experience in the early part of the decade. The recent recession, however, has cut much more deeply than did the prior one of this decade and unemployment is much higher.
Bernanke was already adjusting his stance on inflation risks at the May 2004 meeting, acknowledging that he had been slow to accept that inflation was stabilizing and that a recovery was taking hold. However, he argued for tightening to go slowly.
"Absent major new developments, we need to follow through with the tightening the market now expects, but we should not be overly worried about having fallen behind the curve," he said.
As is currently the case, the Fed at the time had only seen one month of strong jobs numbers, and Bernanke said at the time that the recovery remained fragile.
He drew chuckles, the transcripts say, when he said a quantitative inflation target would be helpful in moving to tighter policy. Bernanke was a strong advocate of inflation targeting while Fed's chairman at the time, Alan Greenspan, opposed the approach.
Bernanke further liked the phrase the Fed used to describe its gradualist strategy — that easy money "can likely be removed at a measured pace" — because he believed it implied no commitment whatsoever.
"No further change in language would be necessary before tightening — or even after the tightening process begins," he said.
Debate over language that introduces a time element to Fed policy foreshadows the debate over the Fed's current low rate, long period vow, which some believe ties the Fed's hands as it plans its exit from a long period of monetary stimulus.
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