Here are a few moments from Wednesday’s FOMC press conference that stuck in our heads, all from Ben Bernanke’s comments in his last Q&A as Fed chair:
On financial instability questions
[W]e can’t control [financial instability concerns] perfectly and there may be situations when financial instability has implications for our mandate … which we saw of course in the Great Recession. So it’s a very complex issue. I think it will be many years before central banks have completely worked out exactly how best to deal with financial instability questions.
Has the chairman been this forthright recently about the Fed’s lack of understanding of financial instability? If so, I don’t remember it. He seemed to take a different approach in his last presser versus, say, congressional testimony. Here’s how Janet Yellen dealt with the same topic in her confirmation hearing last month:
No-one wants to live through another financial crisis, and the Federal Reserve is devoting substantial resources and time and effort at monitoring those risks. At this stage, I don’t see risks of financial instability. There is limited evidence of ‘reach for yield’. We don’t see a broad build-up in leverage or the development of risks that I think at this stage poses a risk to financial stability.
This is closer to what we’re used to, which is essentially: “Look, we have a whole bunch of people working on this thing and don’t see any problems. Next?”
On Bernanke’s personal regrets
Whether or not we could have prevented [the global financial crisis] or done more about it, that’s another question. By the time I became chairman, it was already 2006 and house prices were already declining. Most of the mortgages had been made. But obviously it would have been good to have recognized that earlier and tried to take more preventative action.
Except for the last seven months of 2005 – when the FOMC was on an autopilot rate hiking program of 0.25% per meeting – Bernanke has participated in every FOMC meeting since August 2002 as either a governor or chairman. He never cast a dissenting vote. As a known deflation hawk and inflation targeting advocate, he was closely associated with the June 2003 rate cut that lowered the fed funds rate to its housing boom trough of 1%. He famously dismissed the possibility of a fall in house prices. Were the bolded sentences really necessary?
More on financial instability
Our general philosophy on financial instability issues is where we can that we try to address it first and foremost by making sure that the banking system and the financial system are as strong as possible.
This is another way of saying that the Fed will never again let another large financial institution fail. There’s nothing new here; just a reminder that all talk of ending bailouts is empty and all Fedspeak about the dangers of moral hazard is lip service.