[New York Diary] Bernanke Stresses 'Fed Trust' Amid Powell Undermining

From January 3 to 5, 2025 (local time), the annual meeting of the American Economic Association (AEA) was held in San Francisco, United States, where leading scholars shared their outlooks on the economic policies of a potential second Donald Trump administration. Tariff controversies were a major topic of discussion. Many economists, including Claudia Goldin, a Harvard University professor and recipient of the 2023 Nobel Prize in Economics, expressed concerns about tariff-driven inflation. They predicted that tariff hikes would lead to higher import prices for businesses and overall inflation. However, former Federal Reserve (Fed) Chairman Ben Bernanke and several other scholars argued that it is difficult to predict the targets and duration of potential tariffs, suggesting that their impact on prices would be limited.

These conflicting forecasts and debates over tariffs illustrate the decreased predictability surrounding the economic policies of a second Trump administration, which is set to begin on January 20. David Card, a University of California, Berkeley professor and winner of the 2021 Nobel Prize in Economics, whom I met at the AEA meeting, also cited "Trump uncertainty" as the greatest risk to the U.S. economy this year. It is difficult to predict the ripple effects of any one of Trump’s proposed policies-tariffs, immigration, or tax cuts. As a result, it has become increasingly challenging to prepare for them.

Economists’ forecasts often miss the mark. In most cases, this is not a major issue. However, it becomes a different story if the Fed, which has a significant impact on both the U.S. and global economies, fails in its economic assessments, forecasts, and responses. Incorrect forecasts can lead to policy failures, and the resulting shock must be borne by all economic agents, including households and businesses. The market still remembers the nightmare that followed when Fed Chair Jerome Powell misjudged in August 2021 by stating that "inflation is transitory," only for U.S. inflation to soar from 5.3% to 9.1% by June of the following year. While Powell eventually managed to quell inflation with aggressive rate hikes, Americans’ trust in the Fed declined significantly during the process. Elevated prices and the pain of high interest rates persist. Amid the uncertainties of a second Trump administration, Powell and the Fed now face another major test. Moreover, Trump has repeatedly threatened to fire Powell since his presidential campaign, shaking the Fed’s independence even before returning to the White House.

At this year’s AEA meeting, Bernanke repeatedly emphasized the importance of central bank independence and maintaining credibility. He identified the erosion of the Fed’s independence-not tariffs, immigration, or tax cuts-as the greatest inflation risk under a second Trump administration. He urged the Fed to increase communication with the market and Congress in order to safeguard its independence from the White House. Bernanke also offered specific advice: Fed officials should limit individual statements, and the Fed should present scenario-based policy responses related to economic outlooks to the market. The reasoning was that the market could better anticipate monetary policy changes according to economic conditions, and the Fed could enhance both its policy flexibility and credibility. He also noted that this could lower the market’s expectations that the Fed can always accurately predict the future. During his tenure as chair, Bernanke was the first to make Fed press conferences a regular occurrence, countering criticism of quantitative easing and political attempts to limit the Fed’s independence. He is credited with strengthening the Fed’s independence by abandoning its characteristic mystique in favor of communication with the market. As a result, the audience listened to his cautionary advice with uniformly serious and somber expressions.

We are living in an era of "policonomy," where political power exerts significant influence over the economy. The United States is no exception. However, when economic policy is dictated by political logic, the consequences inevitably fall on the public and the market. If, in addition, the messages from Powell-effectively the "economic president"-and the effects of the Fed’s monetary policy fail to resonate with the market, the resulting damage could be borne by the global financial markets and economy. As the second Trump administration approaches, Bernanke’s warning that the market’s trust is the only safeguard to protect the central bank’s independence from political power is not something we can afford to ignore.

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