Economic and Market Commentary

Two Former Fed Leaders Decode Central Banks: Part 1

In this two-part series, former Fed chairman Dr. Ben Bernanke, who is now a senior advisor at PIMCO, and Dr. Richard Clarida, a former Fed vice chairman who now is PIMCO’s global economic advisor, share policymakers’ playbook for navigating global challenges. For other insights and our latest economic outlook visit: pimco.com/secular.

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Text on screen: PIMCO

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Images on screen: The Federal Reserve building, Dr. Ben Bernanke and Richard Clarida speaking at press conference.

Voice-over: The Federal Reserve is known as the orchestrator of the world’s largest economy. In this two part series, you’ll hear a conversation between Former Fed chairman Dr. Ben Bernanke, who served during the global financial crisis and is now a senior advisor at PIMCO, and Dr. Richard Clarida, who was the Fed vice chairman during the early days of the Covid-19 pandemic and now is PIMCO’s global economic advisor. In this episode, they’ll share insights about how global policymakers are navigating today’s challenges.

Text on screen: What is the Fed’s strategy for navigating today’s challenges?

Images on screen: The Fed building

Bernanke: Well, some banks have been stressed by higher interest rates,

Text on screen: Dr. Ben Bernanke, Former Fed Chairman and Senior Advisor to PIMCO

which have reduced the value of their assets. So far it's been contained to a relatively small number of banks. But the Federal Reserve is certainly on the case as is the FDIC. They've undertaken some programs, some lending programs, and the Fed's keeping a close a close eye on it. But their main mission now, of course, is to try to get inflation down.

Text on screen: Dr. Richard Clarida, Former Fed Vice Chairman and Global Economic Advisor at PIMCO

Clarida: I believe Jay Powell, when he says they're going to keep at it until the job is done. They think they've done enough. They've hiked a lot. They'll probably get some tightening from tighter lending standards. But, a year from now, if inflation's still three and a half plus, I think they've got more to do and I think they'll do it.

Bernanke: Yes. There's an awful lot of uncertainty here. Really hard to forecast how inflation is going to evolve. So far, it's been coming down much more slowly than expected. We've got a now a new wild card, which is the banking situation. And as always is the case, Fed actions take some time to have their effects on the economy, their lags.

My guess is that unless the CPI numbers turn out to be much different than expected, that they'll stay where they are for a while

Clarida: I think there is a bit of a disconnect now between what they think that they're going to do and the market pricing.

Bernanke: I think markets are probably overstating, we saw what happened in a big financial crisis in the Great Recession, and nobody can say for sure how this one will play out. But I think markets might be worried about the possibility that the financial crisis will get much worse and cause a deeper recession, something more analogous to what we saw in 2008, 2009.  

But I think the Federal Reserve's intention I, barring something like that, T\that they want to continue to make progress on inflation. The Fed would like to keep rates where they are, or if necessary, perhaps even raise them a little bit.

Text on screen: What strategies are global policymakers discussing right now?

Images on screen: Global Central Banks

Clarida: There is a forum in which central bankers meet six times a year. It is the BIS. And one of the pleasant surprises, Ben, when I was vice chair, I represented the Fed when Jay Powell could not go, is how valuable those meetings were. It's just central bankers. No reporters, no finance ministers, no politicians. There are a lot of conversations around dinner table at lunch, walking to meetings. And it is a really interesting and useful forum for comparing notes.  

And as we've observed, since a lot of the inflation challenges are pretty common, I'm sure there is a lot of comparing notes among them. And of course there are phone calls and other ways to communicate out outside of that.

Bernanke: Yeah. I also found those meetings really useful. We would go around the table, everybody would talk about what's happening in their economy. And as you point out, the inflation issue is in a lot of countries now, and they're all facing similar trade-offs as they try to decide whether higher interest rates will be sufficiently restrictive and will they have side effects that will be a problem like creating a big decline in employment or creating financial stability issues.

Clarida: I think that the standard toolkit, or the expanded toolkit that Ben writes about in his new book and recent speeches is rates forward guidance in the balance sheet. And what's striking is how similar all the majors are deploying some version of guidance, some version of quantitative tightening and balance sheet, and on rates. I guess the one exception is the Swiss have been known to use foreign exchange intervention aggressively. But other than that, most of the toolkit, the toolkits are pretty similar. Now, wouldn't you say they.

Bernanke: They are pretty similar, although most people who follow this might not be aware that the Federal Reserve has the most limited powers of the major central banks.

Clarida: Why don't you elaborate on that?

Bernanke: Well the Federal Reserve, for example, except when it invokes rare emergency powers, can only buy basically treasuries, securities, and mortgage backed securities that are guaranteed by the government. So it can't really, essentially take any credit risk. But the Bank of Japan buy stocks, equities. The European Central Bank buys..

Clarida: Corporate bonds, right?

Bernanke: Corporate bonds, and a variety of different kinds of securities. The Bank of England has bought corporate bonds as well. And there are times when there's a stress in a particular area, when that might be helpful. I'm not saying that the Fed should lobby for this power, but it's often been the case that the Federal Reserve, as did in the pandemic in March of 2020 when there was a crisis in that spread across a number of securities, the Fed had invoked emergency powers to make loans available to corporate borrowers.

Text on screen: How does the Fed use communications to shape monetary policy?

Images on screen: Federal Reserve press conference

Bernanke: There's been a big evolution in central banking since the 1990s. Prior to that, in the early days of Alan Greenspan as well, secrecy and coded language…

Clarida: Mystery.

Bernanke: Mystery, mystique was the word, was the way that Central Banks operated. But starting in the nineties and going through the last almost 30 years, there's been much more transparency, much more explicit communication

I think that serves two purposes. The first was to try to get markets on board, let markets understand what the Fed was planning, what the fed's reaction function was going to be.

The second reason, and I think Rich can comment on this, is that it's important also to communicate with the broader public. And when Rich was there, you did the Fed listens program. We went around and heard from ordinary people, what they wanted from monetary policy. The Fed is led by unelected officials and it's important to get the accountability and get the feedback from the public.

And for that reason we added press conferences. I started four times a year, and Jay made it eight times a year. So after every meeting, in some ways, the most important event of that day is really what the chair has to say about the decision. So very much the case that central banks are becoming much more visible. And they have much more need to communicate to average people and to the media and others politicians, other than those people who are making decisions in the financial markets.

Clarida: Ben that reminds me, I remember a conversation I had with Jay when we were working together. He says, “Rich, you know, we do such a job communicating now that oftentimes on decision day, there's no mystery about what the decision's going to be.” And so really all the focus is on the press conference. Now, you typically think of a rate decision, that's the headline, but because of the communication going in, it really is the news of the day is typically the press conference, not the statement itself.

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