[Summary] Bernanke's Warning... Stagflation Approaches, Fed's Response Delayed

Ben Bernanke, former Chairman of the U.S. Federal Reserve

[Asia Economy New York=Special Correspondent Joselgina] Ben Bernanke, former chairman of the U.S. Federal Reserve (Fed), warned of the possibility of so-called 'stagflation,' where inflation soars amid an economic slowdown. Unusually for a predecessor, he also openly criticized the Fed's inflation response led by current chairman Jerome Powell.

On the 16th (local time), Bernanke made these remarks in an interview with the New York Times (NYT) and others to mark the publication of his new book, "Monetary Policy in the 21st Century." He explained, "Even under a favorable scenario, an economic slowdown is inevitable," adding, "There will be a period over the next one to two years when growth slows, unemployment rises slightly, and inflation remains high. That is stagflation."

Having led the Fed for eight years from 2006 and acted as a crisis manager during the global financial crisis, Bernanke's mention of stagflation reflects his judgment that inflation in the U.S. and other major countries has become that severe. There are criticisms that central banks, including the Fed, have already missed the timing to respond to inflation. Inflation in major countries has surged to the highest levels in decades amid monetary tightening, the prolonged Ukraine war, China's economic slowdown, and the resurgence of COVID-19, all of which have increased global economic uncertainty more than ever.

Bernanke also acknowledged the possibility of stagflation in an interview with CNBC on the same day. When asked when the Fed should have started responding to inflation, he called it a "complex issue" but pointed out, "The problem is why their (Fed's) response was delayed." He particularly referred to this as a "mistake" in hindsight and added, "They would also agree it was a mistake." It is very rare for a former Fed chairman to publicly criticize his successor like this. The market has long pointed out that the Fed missed the timing to withdraw after unprecedented quantitative easing, which led to a surge in inflation. Bernanke criticized, "Forward guidance slowed the Fed's response to the inflation problem."

He also said, "Rising inflation will quickly become a political agenda." Regarding the difference between unemployment and inflation, he mentioned, "Inflation affects everyone," implying that the social impact of inflation is greater than that of unemployment.

Recently, U.S. inflation has remained at its highest level in over 40 years. The consumer price index (CPI) rose by a staggering 8.5% in March and 8.3% in April. Moody's Analytics analyzed that "U.S. households are spending about $341 more per month compared to the same month last year." Ahead of the midterm elections in November, the perception that inflation is the biggest issue is spreading. According to a survey by market research firm Pew Research, 70% of respondents identified inflation as the biggest problem in the U.S.

This is not just a U.S. problem. Countries around the world are suffering from inflation. The Eurozone, hit directly by the Ukraine war, recorded inflation in the 7% range. Last month, South Korea's consumer price index rose 4.5%, marking the highest level in 162 months since the 2008 global financial crisis.

Such stagflation concerns inevitably become a nightmare scenario for central banks tasked with the critical mission of price stability. Efforts to bring down inflation risk dampening economic recovery.

Bernanke pointed out, "The more the Fed tightens monetary policy to reduce inflation, the greater and more severe the possibility of a recession." Moreover, recent inflation is linked to areas beyond the Fed's control, such as supply chains and raw material prices. Economists currently worry that once hyperinflation occurs, it takes a considerable time to normalize. Former Fed chairman Paul Volcker also failed to prevent a double-dip recession while curbing inflation through monetary tightening.

Signs of stagflation are already being observed by some. The U.S. GDP contracted in the first quarter. Goldman Sachs recently lowered its GDP growth forecasts for the U.S. to 2.4% this year and 1.6% next year, reflecting a slowdown in consumer spending. Chairman Powell has also recently stepped back from the possibility of a soft landing that controls inflation without a recession. If the Ukraine war prolongs and COVID-19 resurges, further worsening global supply chains, the possibility of stagflation will inevitably increase.

Elon Musk, CEO of Tesla, the largest U.S. electric vehicle company and the world's richest person, mentioned the possibility of a U.S. recession on the same day. At an event in Miami, Musk said, "Difficult times are coming," adding, "The recession could last one year or up to 18 months."

Additionally, concerns about a hard landing in China due to COVID-19 lockdown measures are another negative factor for the global economy. China's retail sales in April, released the day before, plunged 11.1% year-on-year. Exports in the same month hit their lowest level since June 2020. The deteriorating external conditions of the two major powers (G2) are cited as factors that further increase emerging market debt vulnerabilities and stagflation risks.

Lindsay Piesza, chief economist at Stifel Financial, said, "We cannot yet say we are in a stagflation phase," but evaluated it as "a very realistic risk given the current economic situation."

This content was produced with the assistance of AI translation services.