NEW YORK -- The Federal Reserve has changed a lot in recent decades. From the late 1970s to the mid-1980s, the Fed was an agent of tough love that raised interest rates well into double digits to beat back runaway inflation. In the late 1990s, it was worshiped as an enabler of the era’s go-go prosperity. And most recently it has courted controversy for the unprecedented steps it took to stabilize the economy in the wake of the financial crisis -- with some critics calling its actions dangerous, and still others saying it has not done enough.
Janet Yellen, the current Federal Reserve chairwoman, joined her three immediate predecessors Ben Bernanke (2006-2014), Paul Volcker (1979-1987) and Alan Greenspan (1987-2006), who appeared via video stream, on Thursday night to help make sense of the Fed’s past, present and future at a panel discussion moderated by CNN’s Fareed Zakaria in Manhattan’s International House, a student residence. The unique event with the four living central bank heads was billed as unprecedented and had a dramatic title to match: “When the Fed Speaks, The World Listens.”
But while the central bank chiefs in attendance served during widely divergent eras and are known to have different political views, the most notable take-away of the evening was the extent of their deep agreement.
There was a consensus that the Fed’s post-crisis rescue efforts have been successful and the economy is currently on a steady growth path, rather than rising thanks to a bubble that will soon burst.
Yellen cited average monthly job growth of roughly 225,000 in the past 12 months and the official unemployment rate of 5 percent as signs that the Fed is striking the right balance under her leadership. She added that she saw no signs that the growth is being driven by a “bubble” -- which is what occurs when skyrocketing prices in sectors have little relation to the value being created.
“This is an economy on a solid course, not a bubble economy,” Yellen said.
“This is an economy on a solid course, not a bubble economy.”
Greenspan, who served nearly 20 years as Fed chair, earning the moniker “the maestro,” is far from Yellen on the ideological spectrum. Yellen was broadly considered a liberal economist during her academic career, focusing on issues of employment and inequality, while Greenspan is famously a libertarian, Ayn Rand acolyte. He nonetheless shared her assessment that there is little evidence of a bubble currently under way.
“I agree with Janet and everyone else that if there is a bubble, it is not a major problem,” Greenspan said.
Volcker concurred, but said he worries about the financial industry’s risky products and practices.
“I certainly don’t think we are in a bubble economy,” he said. “I think there are aspects of the financial world that are overextended and tend to be conducting unduly risky activities.”
The remarks were a sharp rebuttal to the conventional wisdom of the contemporary Republican party and many grassroots conservatives that excessive stimulus from the Fed is either on the verge of sparking a drastic uptick in inflation, or already fostering a stock market or asset bubble.
For example, when House Speaker Paul Ryan (R-Wis.) was House Budget Committee chair he pressured Bernanke over the prospect that Fed policies would “debase” the dollar in 2011. Former Texas Gov. Rick Perry (R-Texas) took it a step further on the presidential campaign trail, calling Bernanke’s bond-buying program “treasonous.”
Bernanke was most explicit in his criticism, calling out members of Congress and the media for fear-mongering about the Fed’s policies.
"If you went back a few years and you listened to media, congressmen, a variety of people, they said the Fed’s asset purchases will cause hyperinflation, will cause the dollar to collapse, will cause energy spikes, will cause financial bubbles and bursts and collapses — none of that has happened," Bernanke said. "What has happened is that those policies — maybe they weren’t by themselves sufficient — but they were helpful."
“Our economy is — even if it's certainly not perfect — it certainly made a lot of progress and monetary policy has helped there,” he added.
The Fed chairs also appeared to agree that there were limits to what the Fed could do on its own. Adjusting the benchmark interest rate and conducting emergency purchases of troubled bank assets only enable the economy to reach its potential when other levers -- namely tax and spending policy -- are functioning effectively as well.
Bernanke was particularly insistent that the Fed’s impact was limited by Congress’ march to cut spending under his watch.
He cited a 2013 Congressional Budget Office report that found that the across-the-board budget cuts put in effect through sequestration, would significantly reduce economic growth.
“I’m not saying that the government should always be spending,” Bernanke said. “But at certain times, particularly in a recession, when the central bank is out of ammunition or ammunition is relatively low, then fiscal policy does have a role to play, yes.”
What followed was perhaps the most notable policy dispute of the evening. Greenspan concurred that fiscal policy played a vital role, but disagreed with the idea that the U.S. government should increase spending during a downturn given the country’s long-term debt challenge.
“I certainly agree that monetary policy should not have the whole load of getting us out of this phenomenon,” Greenspan said. “It is fundamentally a fiscal problem and spending only increases the debt.”
Reducing the long-term debt instead, he argued, was the key to rejuvenating capital investment. That in turn would boost productivity growth and orient the United States for long-term growth.
If those progressives who want a Fed that prioritizes full employment can take heart in the knowledge that the Fed’s recent leaders have rejected the contemporary conservatives' tight money dogma, they should not be confused into thinking that Yellen in particular is interested in bold reform.
Yellen defended the Fed’s current policies at every available opportunity and repeatedly refused the opportunity to make news with a provocative stand. Her staid responses were undoubtedly a function of her role as sitting chair, which Zakaria noted, but they nonetheless preview what we can expect from her leadership.
“I think people might wonder, why not try to do something that would actually help ordinary working people?”
Zakaria posed a particularly interesting question premised on concerns about marginal improvements in the job market that are often the lonely redoubt of progressive Fed watchers. It was the mirror image of the kind of grilling Yellen, like Bernanke before her, endures at the hands of congressional Republicans, furious at the supposed inflation and “debasement” of the dollar that the Fed is prompting by keeping interest rates low.
“For most ordinary people, they must wonder: the Federal Reserve has all this power over the economy,” Zakaria said, through its dual mandate to prevent excessive inflation and ensure maximum employment. “Why not take extraordinary measures to help boost employment, help perhaps even wage growth so that people's wages rise?”
Zakaria then floated the hypothetical idea of allowing inflation that slightly exceeds the Fed’s 2-percent target, since it had been willing to accept it beneath that level for so long.
“I think people might wonder, why not try to do something that would actually help ordinary working people?” he added.
Yellen implied that to do so would undermine confidence in the Fed’s commitment to ensuring price stability.
“Maximum employment and price stability is the mandate Congress gave to us and we take both parts of it very seriously,” Yellen said.
Later, Yellen declined to express regret for the Fed’s decision to raise the benchmark interest rate in December, which Zakaria noted was opposed by many mainstream economists. She also refused to endorse the Minneapolis Federal Reserve bank president’s contention that the Fed should break up the biggest Wall Street banks.
Paul Volcker appeared to implicitly agree with Yellen's reluctance to overshoot the 2-percent inflation. Volcker, after all, was the Fed chair who ended hyperinflation by jacking up interest rates.
Volcker’s nod to Yellen’s restraint was in response to a question about whether the prospect of the Chinese Yuan becoming a reserve currency jeopardizes the role of the dollar in the global economy.
“The dollar will remain a currency of international interest so long as we pay attention to stability at home and operating economy, and we don’t follow the Fareed Zakaria advice of increasing the inflation rate and all that kind of stuff," he concluded, eliciting laughs.