Federal Reserve Chairman Ben S. Bernanke on Friday reflected on his eight-year tenure at the helm of the nation’s economy, celebrating the central bank’s accomplishments but also highlighting what he called “uncompleted tasks.”
Bernanke is stepping down at the end of the month after shepherding the country through the worst financial crisis since the Great Depression. He is widely credited with preventing an economic free fall during the recession, but the lackluster recovery has led to questions of whether the Fed is running out of firepower.
In a speech at the American Economics Association conference in Philadelphia, Bernanke defended his record and the expansion of the Fed’s responsibilities as the bulwark of the economy.
“The recovery has faced powerful head winds, suggesting that economic growth might well have been considerably weaker, or even negative, without substantial monetary policy support,” he said.
The speech amounted to Bernanke’s attempt to chronicle his extraordinary tenure with a relatively objective eye — from the missed signs of impending crisis to the unconventional tools the Fed deployed to rescue the economy — sprinkled with a few personal touches. He also expressed hope that economic growth is finally building momentum and said he is confident that the central bank will be able to withdraw its support smoothly.
Among the Fed’s chief triumphs was an increase in transparency that, Bernanke said, provides the markets and the public with more confidence in the central bank’s ability to steer the economy. The Fed has set a 2 percent target for inflation and outlined parameters for when it will consider raising interest rates.
In addition, Bernanke has attempted to remove the patina of mystery from the secretive institution, both for the public and on Capitol Hill. He visited a military base and lectured students at George Washington University. He also forged relationships with lawmakers that proved valuable as public scrutiny of the Fed heightened.
“I had not entirely anticipated, though, that I would spend so much time meeting with legislators outside of hearings — individually and in groups,” he said. “But I quickly came to realize the importance of these relationships with legislators in keeping open the channels of communication.”
Bernanke also argued that the Fed is making progress in safeguarding the economy from the next crisis. He cited the “stress tests” of major banks, oversight of the shadow banking system and tighter capital standards as critical steps and called for more work on so-called “living wills” that provide a framework for winding down distressed institutions.
But the Fed also has plenty of unfinished work. Although Bernanke helped the economy avert disaster, he has been repeatedly frustrated by the country’s anemic growth.
“The recovery clearly remains incomplete,” he said.
Bernanke acknowledged that the Fed was overly optimistic about how long the economy would take to heal. Notably, he thought households and businesses would be able to dig themselves out of debt more quickly, and he underestimated how cautious they would be to increase spending and investment.
But he also said many of the reasons the recovery has been weak were not only difficult to predict but beyond the Fed’s control, such as the sovereign debt crisis in Europe and natural disasters in Japan.
Bernanke saved his toughest critiques for Washington. Since federal stimulus spending ended in 2010, the government has been a drag on economic growth, he said. After the 2001 recession, government employment rose by 600,000. During the current recovery, he said, it has declined by 700,000 jobs.
“Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive,” he said. “Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.”
Bernanke will leave office at a critical turning point for the Fed. This month, it is taking the first step toward unwinding its unprecedented support for the economy. Although the Fed will not pull the rug out from under the recovery, Bernanke said, he looks forward to the return to more conventional policy for the central bank.
Bernanke said that the Fed has the tools it needs to eventually shrink its more than $4 trillion balance sheet, but that it will be up to his successor to ensure that the tools work. The Senate on Monday is expected to confirm Fed Vice Chairman Janet L. Yellen to take his place.
“Whatever the Fed may have achieved in recent years reflects the efforts of many people who are committed, individually and collectively, to pursuing the public interest,” he said.
Although Bernanke has repeatedly shied from the limelight, his place in the history books is all but assured. After his speech, the roomful of economists rose for a standing ovation.
“There are many people who think they have 20/20 hindsight,” Harvard University economics professor Kenneth Rogoff said at the conference after Bernanke spoke. “But I certainly can think of a lot of people and things that could have done worse. I found their originality blinding.”