By Tyler Durden
Having taken a four month hiatus from blogging, Citadel advisor and former Fed chair Ben Bernanke penned another article on his Brookings blog in which he discusses a familiar subject: that the Fed has run out of tools, a problematic reality which would be exposed by the next financial crisis, so in advance, Bernanke proposes an even more unorthodox monetary policy: price-level targeting.
Pointing out the obvious, namely that as a result of the bursting of the last Fed-created bubble, the US economy remains mired in “low nominal interest rates, low inflation, and slow economic growth” which “pose challenges to central bankers”, central banks may want to consider temporary price-level targeting, or PLT, as Bernanke is “no longer confident” that the Fed’s “current monetary toolbox would prove sufficient to address a sharp downturn.”
The problem, as the ex-Chairman explains, is that with estimates of long-run equilibrium level of real interest rate “quite low,” Bernanke writes that the next recession may occur when the Fed has “little room to cut short-term rates”; as “problems associated with the zero-lower bound (ZLB) on interest rates could be severe and enduring.”
What Bernanke concedes here, is that the current pace of rate hikes and balance …read more