Ben Bernanke is not envious of the “tough call” Janet Yellen must make with respect to raising interest rates. When the former Federal Reserve Chairman was pressed for his opinion, he told Yahoo Finance, “You wouldn’t want your former boss second guessing you.”
Price inflation and the strength of the U.S. economy, particularly employment, are the key factors the Fed uses to guide its interest rate decisions. The unemployment rate has fallen to 5.1 percent, and price inflation remains low because of depressed energy prices.
“The argument for raising rates is that slack is being absorbed, and the unemployment rate is low,” said Bernanke. “The domestic economy at least is pushing forward…and we have a very low inflation rate, [which is] below the Fed’s two percent target. So, that would be the argument for going ahead and getting ahead of the curve,” he said.
Earlier this year, the Fed was widely expected to raise rates in September. However, the global market panic in August quelled expectations for an imminent hike. The Chinese Shanghai Composite Index lost 34 percent in the third quarter of 2015 alone, and other pockets of instability around the world weigh on the Fed’s decisions.
“Although the U.S. economy is pretty strong, the global economy is not that strong,” said Bernanke. “That’s a headwind that’s a drag on our recovery and raises some questions about the sustainability of growth in the United States,” he said.
U.S. markets have slowly reclaimed territory lost during the August meltdown, and the Shanghai Composite has gained 12 percent so far in October. But regardless of economic performance, the Federal Open Market Committee is not expected to raise rates at its meeting next week.
Bernanke said the Fed is keenly aware of the potential for asset price bubbles and other imbalances in this low interest rate environment. However, he does not see any current trouble, saying, “Whether it be in emerging markets, whether it be various asset prices and so on, I have to say I don’t see any asset prices — or major categories of assets — that are wildly out of line.”
Nevertheless, the prolonged period of near-zero interest rates since 2008 does raise concerns for the Fed when combined with the possibility of another recession.
“If we were to get another recession, then we would be in trouble,” Bernanke said. “So there’s a case there for being cautious…You don’t want to have to raise rates and then have to come right back down to zero in a situation where the economy is weak and you don’t have the tools,” he said.
Though Bernanke thinks another recession is possible, the odds are not high because of the growing domestic economy and low price inflation. He tempers this, saying, “There can always be a shock of some kind that was not anticipated, so you want to be careful about your forecasting…Economists are not very good at predicting recessions.”
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- Ben Bernanke
- unemployment rate
- interest rates