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Bernanke Boasts About His Inflation Record -- and He’s Right



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Federal Reserve chairman Ben Bernanke delivered his twice-yearly testimony to the Senate Banking Committee on Tuesday, and during the question period, Senator Bob Corker asserted the following: “I don’t think there’s any question that you would be the biggest dove, if you will, since World War II,” referring to someone with a policy that isn’t “hawkish” on preventing inflation, and may in fact intentionally risk it. Corker asked, “I think that’s something you’re rather proud of . . . Do you all ever talk about the longer term degrading effect of these policies as we try to live for today?”

Bernanke responded by claiming the best record of inflation of any Fed head since World War II: “You called me a dove. Well maybe in some respects I am, but on the other hand, my inflation record is the best of any Federal Reserve chairman in the post-war period, or at least one of the best — about 2 percent average inflation.”

Now, obviously one could quibble about what the “best record” means — but Bernanke is right by two metrics: In recent decades, it’s been generally agreed that the Fed would like to have long-run inflation of 2 percent a year — and it turns out, he’s hit that precisely. There are those who feel that monetary policy should restrict inflation as much as possible rather than continually inflating a currency, and yet Bernanke, despite his “dovish” policies, has actually had the lowest inflation of any post-war chairman, too. Catherine Rampell of the New York Times explains:

Michael Feroli, an economist at JPMorgan Chase, crunched the numbers.

“If the definition of ‘best’ is 2 percent inflation, then it’s hard to question his record, as he is spot on that number,” Mr. Feroli wrote in a note to clients.

Other Fed chairmen have had lower inflation rates; Eugene Meyer’s tenure, from 1930 to 1933, averaged negative 9 percent inflation, which is not exactly desirable. But Mr. Feroli calculates that no one in the postwar period had a lower inflation track record.

Here’s the chart she provides:

Obviously some of these chairmen, such as Paul Volcker, entered office during a time of high inflation and had to rein it in. And further, there are plenty of reasons to fault Bernanke for his policies in the years between 2007 and 2009, when many feel he didn’t do enough to respond to the financial crisis, effectively tightening the money supply as the economy deteriorated. Further, there are also a lot of commentators who believe that, ideally, the Federal Reserve would have a higher inflation target — either implicitly, as part of a nominal-GDP-targeting rule, or explicitly — but that isn’t currently what Bernanke’s trying to do.

As Ramesh mentioned earlier this morning, there also doesn’t seem to be much to worry about lurking down the road: The Cleveland Fed calculates what the market is predicting for inflation based on the spread between inflation-adjusted Treasury bonds and normal ones, in addition to some further adjustments. By this calculation, inflation is expected to average 1.53 percent over the next ten years (the raw spread between the two is about 2.5 percent right now).



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