The Fed’s ‘15 Minutes’ Have Come and Gone

It’s been 15 years since Ben Bernanke on “60 Minutes” vowed that the Fed would never have to fear inflation because “we could raise interest rates in 15 minutes, if we have to.” Wouldn’t you know it, but the bank is having the dickens of a time getting inflation down to its 2 percent target after President Biden’s price spiral. Turns out that part of the problem is the Fed’s swollen balance sheet, which Mr. Bernanke supersized under his “Quantitative Easing” scheme.That was supposed to be a temporary program under which the Fed hoovered up assets like bonds, aiming to boost the economy by keeping interest rates low. Wasn’t that “a terrible idea?” asked “60 Minutes” back in 2010, noting the concern that “many people believe that could be highly inflationary,” even “a dangerous thing to try.” At that time, the Fed’s balance sheet was about $2.4 trillion. Far from being temporary, it soared to some $9 trillion by 2022.Mr. Bernanke — who would go on to be awarded the Nobel for economics — scoffed at the question. “This fear of inflation, I think is way overstated,” he averred. Asked whether inflation was “less of a priority” for the Fed, the chairman averred: “absolutely not.” He added: “We’ve been very, very clear that we will not allow inflation to rise above two percent or less.” The only “trick,” he said, “is to find the appropriate moment when to begin to unwind this policy.”Nearly 15 years later, Americans are still waiting. As prices surged some 20 percent during Mr. Biden’s presidency, the Fed — under Mr. Bernanke’s successor, Jay Powell — sat on its hands, waving away the inflation as “transitory.” After the Fed belatedly raised interest rates, inflation ebbed from its peak in June 2022 of 9.1 percent. Yet the Fed took its foot off the brake, lowering rates in the leadup to the election. Now inflation is above 2 percent again.The Fed’s bloated balance sheet — which now stands at a little under $7 trillion — is one factor making it more difficult to get inflation back under control. Our Larry Kudlow is among those who grouse about how the Fed’s “mistaken and misguided models” got us into the inflation predicament. In December, he urged the Fed to “get rid of their excess money by chopping down the balance sheet by several trillion dollars.” The Fed, to its credit, has since March 2023 been slowly running down its balance sheet by letting assets mature and not replacing them. There’s still a long way to go before the central bank gets back to its balance sheet’s traditional low level — less than $1 trillion. That’s where it had long rested until Mr. Bernanke began his monetary experiments. Now, though, Reuters reports that the central bank is getting cold feet about shrinking its balance sheet.Citing minutes of the Fed’s last meeting of the Open Market Committee, Reuters notes that “expectations” for the Fed’s “balance sheet drawdown process” — Quantitative Tightening — “have been scrambled.” Fed leaders are “concerned about how the effort to shed bonds might,” per Reuters, “collide with dynamics around the federal debt ceiling.” Seems Uncle Sam’s debt problem could conflict with plans to normalize the Fed’s balance sheet.Analysts at LH Meyer raise concerns that “pausing potentially turns into a full stop if not resumed,” because “resumption might prove tricky.” That suggests an echo of the “Taper Tantrum” of 2013, when markets panicked at the prospect of the Fed scaling back its Quantitative Easing purchases. The markets had gotten too accustomed to the Fed’s easy-money policies. So the central bank resumed racking up assets. The balance sheet swelled anew.As for Mr. Bernanke, in 2022 he expressed regrets that the Fed didn’t act faster to quell inflation.“In retrospect, yes, it was a mistake,” he lamented. Maybe, he said, the Fed feared “to shock the market.” The critical mistake, though, was ignoring the warnings of inflation some 15 years ago. Today, amid persistent inflation, the plunging gold value of the dollar is the real shock — and a reproach of the Fed’s policies. So much for Mr. Bernanke’s “15 minutes.”

The Fed’s ‘15 Minutes’ Have Come and Gone

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