Bernanke: "Fed Must Cool Overheated Labor Market... Economic Slowdown Inevitable"

Ben Bernanke, former chairman of the U.S. Federal Reserve (Fed), diagnosed that in order to lower inflation, the overheated labor market must cool down, and economic slowdown is inevitable to achieve this. He pointed to the pandemic-induced supply shock and government stimulus measures as the combined causes of the most severe inflation in the U.S. since the 1980s.

[Image source=AP Yonhap News]

According to the Brookings Institution, on the 23rd (local time), former Chairman Bernanke, together with Olivier Blanchard, former chief economist of the International Monetary Fund (IMF), released a report containing these findings. In the report titled "What Caused Inflation in the U.S. Pandemic Era," Bernanke stated, "To control inflation, it is ultimately necessary to achieve a better balance between labor demand and labor supply."

First, Bernanke diagnosed that the supply shock caused by the COVID-19 pandemic was the direct trigger for the sharp rise in inflation in 2021. He also viewed the subsequent fiscal stimulus and low interest rates, which overheated the economy, as the background factors sustaining high inflation.

This effectively provides an answer to the heated debate over the past two years about whether the surge in inflation was due to government stimulus or the COVID-19 pandemic disruption. The Wall Street Journal (WSJ) reported, "The answer found by two of the most cited economists in the world and the top U.S. economists is both (stimulus and pandemic disruption)," adding, "Their conclusion is that for inflation to disappear, the economy must cool down, which means the labor market will weaken."

In particular, Bernanke noted that while the sharp rise in commodity prices was the main driver of inflation surges over the past two and a half years, the impact of the overheated labor market has recently been growing. He diagnosed that unless the labor market overheating cools down, inflation is likely to persist and become entrenched.

However, it is unclear to what extent the unemployment rate must rise for inflation to fall to the target level. The U.S. unemployment rate was 3.4% in April, the lowest in decades. Meanwhile, despite high-intensity tightening measures starting last year, U.S. inflation still far exceeds the Fed's price stability target of 2%.

Bernanke explained, "With the labor market still below sustainable levels and inflation expectations high, the Fed has concluded that economic slowdown is unavoidable to bring inflation back to the price stability target," adding, "The degree of that slowdown depends on specific structural characteristics of the labor market and the efficiency of connecting workers with jobs."

Meanwhile, in another report released by the Brookings Institution, former Fed Vice Chairman Donald Kohn argued that the Fed's response was delayed during the process of flexibly adopting the inflation target in 2020 and providing forward guidance to support it.

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