Former Federal Reserve chief Ben Bernanke has urged current policymakers to pay attention to signs of a worsening global economy amid the war in Ukraine and currency instabilities.
Bernanke explained that although the U.S.’s current standing was better than in the late 2000s global crisis, there were economic concerns in other parts of the world. He said while emerging economies were “facing a very strong dollar and a lot of capital outflows,” European financial institutions faced Russia's threat to cut off gas supplies.
“Even if financial problems don’t begin an episode, over time, if the episode makes financial conditions worse, they can add to the problem and intensify it, so that’s something I think that we really have to pay close attention to," he said.
The former chairman argued that the Fed needed to find ways to bring inflation down without causing a recession. He said doing so was a “medium-term target” that did not have “to be met within six months or anything like that.”
During his tenure as a Fed chairman, Bernanke faced the 2008-09 financial crisis caused by a housing market failure. The Fed was too late to recognize the risks of falling home prices for the entire economy. Later, however, Bernanke and the organization managed to prevent the crisis from transforming into a financial depression.
On Monday, Bernanke, alongside Douglas Diamond and Philip Dybvig, received a Nobel Prize in Economics for a study on bank runs, financial crises and methods to prevent them. Diamond, who teaches at the University of Chicago, discussed the current economic crisis during the award press conference.
Diamond said the U.S. banking system was better than in 2008, thanks to new regulations. He refused to comment on the U.S. inflation and the central bank’s monetary policy but praised the Fed for "doing remarkably well in terms of financial stability.” Diamond nevertheless reminded central bankers to be careful when raising interest rates to prevent panic among citizens and financial instability.
Interest rate hike
The Fed is reportedly preparing for another significant interest rate hike in the next Federal Open Market Committee (FOMC) meeting on November 1-2. U.S. central bankers use the approach to slow down the economy in the wake of inflation. As the economy slows down, policymakers work to balance price stability and employment rate using fiscal policies.
During Bernanke’s leadership, the Fed adopted a two percent inflation target. According to research, this target is useful in helping central banks control the highs and lows in economic systems.
Consumer price index (CPI) data in August showed a year-over-year rate of 6.2 percent, exceeding the Fed’s target. This week, investors are waiting for the release of September’s CPI, which will allow them to peek into the possible decisions by the Fed in the upcoming meeting.
Last week, September’s job reports showed that the unemployment rate had declined to 3.5 percent with 263,000 added payrolls. The finding indicated that the U.S. job market remained strong, increasing the likelihood of another interest rate hike, as said by LPL Financial chief economist Jeffrey Roach.
“This puts the nail in the coffin for another 75 [basis point rate increase] in November,” Roach said.