Federal Reserve Chairman Ben Bernanke discusses the QE3 policy at a news conference.
A little over a month ago, the Federal Reserve Bank celebrated its 100th anniversary. President Woodrow Wilson signed legislation creating the central bank on Dec. 23, 1913. The following year, the builders of the Federal Reserve System began laying the framework for a system of regional “reserve banks” designed to offer a bank of last resort to the nation’s financial institutions.
More than just a single, central bank, the Federal Reserve plays a vital role in sharing and communicating economic information that becomes the basis for the nation’s monetary policy. Fiscal policy – decision on taxes and spending – is the realm of Congress.
But expanding and contracting the nation’s supply of money, which has impacts on inflation and on unemployment, is left to the Federal Open Mark Committee. This group includes the seven members of the Board of Governors, plus the presidents of each of the regional reserve banks.
The last eight years – a period coinciding with two terms of service by Federal Reserve Board Chairman Benjamin Bernanke – have strained the confidence of this system. Bernanke, who departed the Fed yesterday, was criticized vehemently by both the left and the right.
In spite of undertaking an aggressive loosening of the money supply in the wake of the recession that began in 2007 and 2008, monetary policy “doves” felt he needed to do more to combat the economy’s then-staggering rates. Bernanke went about as low as he could go – keeping short-term interest rates as low as possible: effectively zero percent.
His critics on the right were, if anything, more vocal. In continuing to take steps to stimulate the economy, these monetary policy “hawks” insisted that the nation would soon lapse into inflation.
“The blasting of Bernanke from both extremes is, to put it mildly, unprecedented,” wrote Roger Lowenstein in a 2012 profile of Bernanke in The Atlantic. “Then again, the stakes have seldom been so high. With Congress paralyzed on fiscal issues, Bernanke has more influence than anyone else over the economy. As Lawrence Katz, a prominent economist at Harvard, told me, ‘He is sort of the only game in town.’”
In our view, Bernanke embodied the best traditions of the Federal Reserve System. Whatever the institution’s failings, or Bernanke’s, few can deny that the Federal Reserve provides a strong institutional ballast against the inherent fluctuations of a market economy.
In the midst of the most trying economic period since the Great Depression, Bernanke did what the Fed does best: coalesce information from a decentralized series of reserve banks, and from expert economists, to build consensus about the best monetary policy levers to use in stabilizing the economy on a path of low inflation and low unemployment.
Just as Alan Greenspan’s legacy as Federal Reserve Chairman wasn’t complete the day after he left the institution, the same will be true of Bernanke. We hope incoming Chairman Janet Yellen – who today begins her first term at the helm of the institution – will follow Bernanke’s example of consensus, transparency, and prudence.