November 21, 2017

The Audacious Pragmatist

“Since then,” Mr. Bernanke told his audience, “I’ve developed a view that central bankers should not try to determine fundamental values of assets.”

Indeed, Mr. Bernanke’s academic work, largely at Princeton, helped shape the conventional wisdom that central banks couldn’t spot asset bubbles and shouldn’t try to pop things that looked like bubbles. In his first speech as a Fed governor in 2002, he reiterated that trying to judge the sustainability of rapid increases in housing or stock prices was “neither desirable nor feasible.”

Over the next several years, he said repeatedly that he saw no clear evidence of a housing bubble. And in 2004, the Bernankes paid a hefty $839,000 for a town house on Capitol Hill in Washington.

It took a great recession to change his mind. The recession, prompted by the collapse of the housing bubble that Mr. Bernanke — and most other experts — failed to see coming, ended an era of minimalism in central banking. And there is no better marker than the views of Mr. Bernanke, the world’s most influential central banker, who now argues that the Fed needs to consider a range of previously unthinkable actions, including trying to pop bubbles when necessary, because sometimes the cost of doing nothing is worse.

Mr. Bernanke, who plans to step down in January after eight years as Fed chairman, will be remembered for helping to arrest the collapse of the financial system in 2008. This shy, methodical economist who had been expected to serve as the keeper of Alan Greenspan’s flame — to preserve the Fed’s hard-won success in moderating inflation — emerged under pressure as perhaps the most innovative and daring leader in the Fed’s history.

But what Mr. Bernanke did after the crisis may prove to have even more enduring influence. For almost three decades, the Fed focused on moderating inflation in the belief that this was the best and only way to help the economy. In the wake of the crisis, Mr. Bernanke forged a broader vision of the Fed’s responsibilities, starting experimental, incomplete campaigns to reduce unemployment and to prevent future crises.

The Bernanke Fed has failed to fully achieve its goals. Growth is still tepid, unemployment still too high, inflation still too low. Some critics continue to warn — so far, incorrectly — that its efforts will unleash inflation or destabilize financial markets.

Yet many of the Fed’s experiments are already being emulated by other central banks. And Mr. Bernanke’s many admirers say it is hard to imagine that anyone else could have done more under the circumstances to restore the economy. Fortunately, they say, his lifelong study of central banking under stress meant that he not only knew the available options but also understood that those options weren’t enough. And he had the credibility necessary to convince a hidebound institution to change quickly.

“It’s hard to say that the Fed has accomplished what could have or should have been accomplished,” said Michael Woodford, an economist at Columbia University. “Yet in the context of the difficulty of the challenges, the likelihood is that few other central bankers could have been as bold as Ben has been.”

Throwing Stuff at the Wall

Mr. Bernanke was a rising star at Princeton in 1994 when he persuaded 953 people to elect him to a second job — as a member of the Montgomery Township Board of Education. “I did think he was a little crazy” to add that second role, said Mark Gertler, a New York University economist who was a frequent academic collaborator with Mr. Bernanke during the 1990s.

But the move was instead an early sign of Mr. Bernanke’s restlessness with the theoretical world of academia and his nascent interest in public service. And the experience helped to prepare him for larger things.

For six years, he spent several nights a month in the library of the local high school, usually dressed in a sport coat with elbow patches, calmly contributing to heated debates about building new schools in his rapidly growing community.

“When I met him he was shy and awkward,” Professor Gertler said. “It developed his ability to moderate meetings and interact with people.”

Kitty Bennett contributed research.

Article source: http://www.nytimes.com/2013/08/25/business/economy/the-audacious-pragmatist.html?partner=rss&emc=rss

News Analysis: Two Economies in Turmoil, for Different Reasons

Yet his primary audience, the investors whose decisions spread Fed policy through the economy, responded as if the news had been grim. The Standard Poor’s 500-stock index took its worst two-day dive since November 2011 and has lost 5 percent of its value in the last month. Wells Fargo, the nation’s largest mortgage lender, raised its advertised rate on 30-year loans to 4.5 percent from 3.9 percent in the same period.

The call-and-response underscores the complexity of the Fed’s task as it seeks to do more to help the economy, but not too much.

Fed officials increasingly are convinced that they are finally doing enough to stimulate the economy — not just the steps already taken, but the plans they have detailed for the next several years. That is why they felt comfortable suggesting that they could begin before the end of the year to scale back their purchases of government securities. But some critics see clear evidence in the persistence of high unemployment and low inflation that the Fed should do even more. And many others are simply nervous.

“People aren’t sure that the economy is well enough for the Fed to pull back,” said Paul Christopher, chief international strategist at Wells Fargo Advisors. “The market is signaling to the Fed that we don’t trust your assessment of the economy; we don’t trust your assessment of inflation.”

On Wednesday, Mr. Bernanke sought to underscore that the Fed still planned to stimulate the economy on a big scale over the next few years. The central bank continues to hold short-term interest rates near zero, and Mr. Bernanke said it might maintain that policy for longer than previously expected. The Fed has amassed more than $3 trillion in Treasury securities and mortgage-backed securities, and Mr. Bernanke said that it no longer intended to sell the mortgage bonds as the economy improved.

Yet public attention focused almost entirely on the least potent part of the Fed’s stimulus effort, its pledge to expand its holdings of mortgage bonds and Treasuries to increase job growth.

Those purchases will continue for now, but Mr. Bernanke for the first time sketched a timeline for winding them down, beginning this year and ending next summer, as long as growth keeps pace with the Fed’s expectations. Specifically, he said that the Fed expected the unemployment rate to decline to 7 percent by next summer, from 7.6 percent in May.

Many investors responded as if Mr. Bernanke had said only that the Fed soon intended to reduce its bond purchases.

This was a good demonstration of the difference between probably and certainly. While the timeline generally corresponded to investors’ expectations, Mr. Bernanke’s remarks made it official. And his repeated insistence that investors should focus instead on the evolution of economic data worked about as well as telling people not to think about purple kangaroos.

“If you draw the conclusion that I’ve just said that our policies, that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy,” Mr. Bernanke said in one response to a question at a news conference on Wednesday.

Some analysts and economists said the reaction was particularly striking because the Fed seemed more committed than ever to its stimulus campaign.

“They are getting very close to where I would have had them be two or three years ago,” said Joseph E. Gagnon, a former Fed economist and architect of the first round of asset purchases who is now a senior fellow at the Peterson Institute for International Economics. “I find it odd, and probably the chairman is surprised and unhappy with the market reaction, too.”

The Fed declined on Thursday to comment on the market reaction to Mr. Bernanke’s remarks. But he expressed himself clearly during the news conference on the negative market response since his last public appearance in May. “Well, we were a little puzzled by that,” he said.

He also acknowledged that the Fed might need to respond if the market’s reaction persisted. “It’s important to understand that our policies are economic-dependent,” he said. “And in particular, if financial conditions move in a way that makes this economic scenario unlikely, for example, then that would be a reason for us to adjust our policy.”

Some analysts said that would not be necessary, arguing that the market would soon settle down.

Others, however, saw legitimate reasons for concern.

The Fed has made the unemployment rate the measuring stick for its stimulus effort. It doubled down on Wednesday by saying that it would buy bonds until the rate fell to 7 percent.

But the unemployment rate so far has fallen almost entirely because people have stopped looking for work. The share of adults with jobs, known as the employment-to-population ratio, has barely changed over the last three years. In past recoveries, declining unemployment has encouraged people to re-enter the labor market, but some economists argue that that will not begin to happen until the rate falls well below 7 percent.

“Why is monetary policy linked to unemployment rate as opposed to employment-to-population ratio?” Amir Sufi, an economist at the University of Chicago, wrote on Twitter. “Seems bonkers. Does anyone seriously think labor market is improving dramatically?”

Jan Hatzius, chief economist at Goldman Sachs, wrote in an e-mail that he doubted the Fed’s current plans would be sufficient. “I am much less sanguine under our forecasts for the economy,” he wrote, “and to a somewhat lesser degree even under theirs.”

Article source: http://www.nytimes.com/2013/06/21/business/economy/two-economies-in-turmoil-for-different-reasons.html?partner=rss&emc=rss

With Little to Cheer, 3 Major Indexes End Week Lower

All three of the major stock indexes on Friday posted their first down week since mid-April, held back by lingering concern that the Federal Reserve might scale back the economic stimulus measures that have also propelled the markets’ rally.

Still, the indexes closed well off their lows in sparse trading Friday ahead of the three-day Memorial Day weekend. The Dow Jones industrial average ended slightly higher, buoyed by a 4 percent gain in Procter Gamble shares; the Standard Poor’s 500-stock index and the Nasdaq composite index both finished a shade lower.

On Friday, the Dow gained 8.60 points, or 0.06 percent, to 15,303.10. The S. P. 500 edged down only 0.91 of a point, or 0.06 percent, to close at 1,649.60. The Nasdaq dipped 0.27 of a point, or 0.01 percent, to 3,459.14. For the week, the S. P. and the Nasdaq were down 1.1 percent, and the Dow was off 0.3 percent.

A 3.3 percent jump in April orders for long-lasting manufactured goods, like refrigerators and toasters, showed that the economy might be stronger than some had thought.

“A day like today is clear evidence that there is still money on the sideline to get into equities,” said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, N.Y. Investors, he said, are “looking for almost any excuse to get in.” Over all, the market’s declines have been short and shallow since November.

“Investors are taking advantage of down days to put more cash to work,” Mr. Ghriskey said, “especially when the decline is not based on something fundamental.”

Trading has been choppy since Wednesday as investors here and abroad grappled with the Fed’s evolving stance on stimulus. The markets have been focused on the possibility that the $85 billion a month in bond purchases made by the Fed will be scaled back later this year, after recent Congressional testimony by the Fed chairman, Ben S. Bernanke, and minutes from the Federal Open Market Committee’s latest meeting.

The minutes showed some disagreement among the policy-setting committee’s members “in terms of the approach moving forward, specifically the time frame” of the unwinding of the Fed’s stimulus efforts, said Peter Kenny, chief market strategist at Knight Capital in Jersey City, N.J.

The measures have been instrumental in a rally that has driven stocks to record highs, not counting inflation. Even as there is some fear that the Fed will exit too soon, many analysts say the eventual reduction of the bond-buying will come with an expansion of the economy and corporate earnings, which would continue to support equities.

Joe Bell, a senior equity analyst at Schaeffer’s Investment Research in Cincinnati, said many people had credited the Fed for the recent rally without considering improvement in the job market or the housing sector. “The economy in general has been on a lot better footing than perhaps people have given it credit for,” he said.

The benchmark 10-year Treasury note barely moved on Friday, adding 1/32 to trade at 97 21/32, as its yield slipped to 2.01 percent, from 2.02 percent late Thursday evening.

Procter Gamble shares rose 4 percent, to close at $81.88, after the company, the world’s largest maker of household products, brought back A.G. Lafley as its chief executive on Thursday in the midst of a major revamping.

Tesla Motors rose to a 52-week high on Friday as bets against the stock decreased, suggesting another bout of short-covering in the electric carmaker’s shares. Tesla stock jumped 4.7 percent, to $97.08, after rising as high as $97.95.

Abercrombie Fitch was among the S. P. 500’s biggest losers after the retailer cut its profit forecast and said quarterly comparable sales fell 15 percent. Its stock lost 8 percent, to close at $50.02.

Shares of Sears Holdings plummeted 13.6 percent, to $50.25, after the retailer reported a bigger-than-expected quarterly loss on Thursday.

Article source: http://www.nytimes.com/2013/05/25/business/daily-stock-market-activity.html?partner=rss&emc=rss