Bernanke: Fed’s slow response to inflation was ‘mistake’

Former Federal Reserve Chairman Ben Bernanke said the central bank made a “mistake” by responding too slowly to surging inflation. 

In a Monday interview with CNBC, Bernanke said the Fed should have started the process of hiking interest rates sooner than it did as inflation began to rise last year and the Biden administration pumped another $1.9 trillion in stimulus into the economy.

“In retrospect, yes, it was a mistake, and I think they agree it was a mistake,” Bernanke said in an interview with CNBC’s “Squawk Box.”

“There were a couple of issues, I think, that are related primarily to the pandemic itself and the way that it’s scrambled the usual indicators that made it harder for the Fed to read the economy,” he continued.

Fed Chairman Jerome Powell and bank officials are racing to raise interest rates high enough to curb inflation, which stood at an annual rate of 8.3 percent in April, without slowing the economy into a recession. A growing number of economists fear the Fed waited too long to raise interest rates after slashing them to near-zero levels in March 2020 and buying trillions of dollars in bonds to keep credit markets flowing.

Bernanke, who chaired the Fed from 2006 to 2014, said the central bank made two main mistakes in responding to the surge of inflation: being too slow to pivot toward hikes out of concerns of spooking markets, and assuming pandemic-related supply shortages and hiring troubles would pass several months ago.

“The Fed believed in the middle of 2021 that these factors would likely solve themselves over time — that, in other words, that the supply shocks were called transitory and so … they didn’t need to respond to the early stages of inflation because it was going to go away by itself. That proved wrong.”

Powell and top Fed officials have acknowledged they waited too long for the factory shutdowns, bottlenecks, shipping delays, shortages and lack of large improvement in labor force participation — all of which are related to the pandemic and driving prices higher — to ease before hiking interest rates. The Fed also sought to avoid several mistakes made during Bernanke’s tenure, including failing to cut interest rates in advance of the 2007-08 recession and causing financial market dysfunction when pulling back bond purchases abruptly in 2013.

“Jay Powell was on [the Fed] board during the taper tantrum in 2013, which was a very unpleasant experience. He wanted to avoid that kind of thing by giving people as much warning as possible. And so that gradualism was one of several reasons why the Fed didn’t respond more quickly to the inflationary pressure in the middle of 2021,” Bernanke said.