I table my expectations of what the Fed will be like with Janet Yellen at the helm for the next four years, by looking back eight years to when Ben Bernanke was coming on deck. The Bernanke chairmanship’s key accomplishments were expected to be: a move towards greater transparency in the Fed’s decision-making process; the adoption of inflation targets; and an emphasis on gradualism-policy changes implemented in small increments and carried out over an extended period of time. Clearly the events affecting actual policy in the Bernanke Fed overshadowed these expected policy changes and underscore the usual caution regarding forward-looking statements.
Helicopter Ben’s chairmanship was characterized by several dramatic innovations to Fed policy and operations: the Term Asset-backed Lending Facility (TALF); the Term Auction Facility (TAF); Term Securities Lending (TSLF); Quantitative Easing I (QE1), II (QE2) and III (QE3); and Operation Twist among others. In addition, the Fed Funds Rate target has been cut to between 0 and 0.25 percent and maintained at that level. Not only did these innovations cross the long-held line that the Fed only deals in government-issued securities, but the Fed also assisted the Treasury in buying stock in this country’s biggest banks and largest insurer. In the process the Fed’s balance sheet ballooned from less than $900 billion to well over $2 trillion. While these dramatic changes garnered countless headlines, Bernanke also achieved the more mundane accomplishments that were expected of his chairmanship eight years ago.
Bernanke’s more mundane accomplishments have changed the Fed’s day-to-day operations in ways that should encourage financial market stability. Transparency has been improved by specifying the forecasts the Fed uses in its decision-making; by holding a news conference after each meeting of the Federal Open Market Committee (FOMC); and by announcing the longer-term direction of Fed policy (forward guidance), such as maintaining the Fed Funds Rate target of 0 to 0.25 percent through late 2015. The Fed’s competing goals of maintaining maximum employment and low inflation are made clear by specifying thresholds for the unemployment rate (below 6-1/2 percent) and the inflation rate (above 2-1/2 percent) at which it will consider changing its interest rate policy. Gradualism has been evident in the Fed actions later in Bernanke’s tenure when we got past emergency response mode: QE3 has been implemented as a steady infusion of money over an extended period of time while its unwinding, the ‘Great Taper’, is also expected to start small and extend over an approximate 9-month period and consist of smaller injections rather than withdrawals of money from the system.