Odds are Federal Reserve Chairman Ben Bernanke almost certainly won’t seek to be appointed to another four-year term in 2014. So 2013 represents his final lap around the track.
How will economic historians judge his tenure running the central bank? To some degree that verdict depends on whether the Fed can exit its low-interest rate policy and reduce its ginormous balance sheet in a way that prevents rising inflation or a sharp economic slowdown.
Beyond that, I subscribe to the criticism that the Fed was too tight in 2007 and 2008, helping turn a modest downturn into the Great Recession. And had Bernanke earlier couched his policy guidance in terms of specific unemployment and inflation numbers, his quantitative easing policy might have proven more effective. Indeed, by better managing expectations, the various QE rounds could have been smaller or even, perhaps, unnecessary. Still, the Bernanke Fed has moved closer to my preferred policy of NGDP level targeting, which is great.
In a new analysis, AEI’s Stephen Oliner, a former Fed economist, looks at the issue of the Bernanke legacy, particularly in terms of communications and transparency:
A full assessment of the Bernanke Fed is still years away. That said, a favorable judgment can be rendered already on the changes the Fed has made in how it communicates with the public about monetary policy. With a strong push from Bernanke, the Fed has moved a long way toward greater transparency. But there is still important unfinished business on the communication agenda that relates to the Fed’s tolerance for inflation. I hope this issue will be addressed in Bernanke’s final year.
Oliner says the low level of the Fed’s new 2.5% inflation threshold shows the central bank still has “very little tolerance for inflation above its target.” But it’s unclear what happens next once “lift off” occurs, and the Fed begins raising interest rates. How will it meet its dual mandate in the future? As Oliner suggests, Bernanke could use the next year to shape the path forward. Whether the Fed moves even closer to NGDP level targeting might depend on what happens at the Bank of England under new boss Mark Carney, who has been positive about the idea.
Oliner also gives the inside line on the next Fed chairman: “Bernanke has a very able successor waiting in the wings – the current Vice Chair, Janet Yellen.”