Former Federal Reserve chairman warns of ‘stagflation’ crisis similar to the 1970s

The former Federal Reserve chairman warned of a coming economic morass in the next decade.

Eric Garcia
Monday 16 May 2022 20:40
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Inflation fuels unusual trends in job market

Former Federal Reserve Chairman Ben Bernanke warns in his new book that the United States could face simultaneous sky-high unemployment and inflation on levels not seen since the 1970s, The New York Times reports.

Mr Bernanke, who ran the United States’ central bank from 2006 to 2014, said he wrote his book during the Covid-19 pandemic and it provides a history of the Federal Reserve and how it responded to economic crises in the past century.

Mr Bernanke said he is confident that current Federal Reserve Chairman Jerome Powell, whom the Senate confirmed to serve a second term last week, can handle the troubled waters but warned about stagflation, which is when both unemployment and inflation are high.

“Even under the benign scenario, we should have a slowing economy,” he told The Times. “And inflation’s still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high.”

In turn, he said, “So you could call that stagflation.”

In the 1980s, former Federal Reserve Chairman Paul Volcker drastically raised interest rates to tame inflation, which triggered a recession and massive public anger toward the Federal Reserve. Mr Bernanke, who served during George W Bush and Barack Obama’s presidencies during the financial crisis of 2008 and the subsequent Great Recession, said inflation was more universally felt.

“The difference between inflation and unemployment is that inflation affects just everybody,” Mr Bernanke said. “Unemployment affects some people a lot, but most people don’t respond too much to unemployment because they’re not personally unemployed. Inflation has a social-wide kind of impact.”

Mr Bernanke also said that the Federal Reserve should not move its inflation target, which is currently at 2 per cent.

“Inflation targets should not be used as a short-run tool, you know?” he said. “If you raise the inflation target to 3 percent for some short-term purpose, then why not 4 percent, or why not 3.5 percent, or why not create a band, or whatever?”

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