In case you missed the late announcement, Ben Bernanke is scheduled to deliver a speech on Wednesday afternoon, covering the Federal Reserve Bank's track record through its 100 year history.
Presumably, he'll also spend time defending current policies, in both prepared remarks and the question-and-answer session to follow.
In advance of what could be a market-moving talk, it seems appropriate to consider what's been said in the past about the Fed's policy record. I suggest seeing if you can name the source of each of the following excerpts:
The problem for the Federal Reserve System and other factors which influence credit is not one of preserving money rates at a uniform level, but of exerting an influence so that rates may be adapted to the economic swing of business. High money rates at times of overstimulation and low money rates at times of understimulation should, in the long run, assist in flattening out the fluctuations of business and bringing about a more even prosperity. There is no convincing proof that the Reserve System has reduced the fluctuations of the business cycle, but its influence has been in that direction. (The emphasis is mine.)
Whether the dominant cause of the Great Moderation is structural change, improved monetary policy, or simply good luck is an important question about which no consensus has yet formed. I have argued today that improved monetary policy has likely made an important contribution not only to the reduced volatility of inflation … but to the reduced volatility of output as well. … This conclusion on my part makes me optimistic for the future… (Again, the emphasis is mine.)
- This is from a book published in 1929 by the National Bureau of Economic Research (NBER) and titled Recent Economic Changes in the United States, Report of the Committee on Recent Economic Changes of the President's Conference on Unemployment. The authors were O.M.W. Sprague and W. Randolph Burgess.
- This is from Ben Bernanke's memorable 2004 speech on the "Great Moderation."
100 years of overconfidence?
From the first excerpt, we see that overconfidence in the Fed extends as far back as the 1920s, which is when the central bank first attempted countercyclical policies to smooth out the business cycle. We all know how that turned out.
The second excerpt tells us that overconfidence is as strong as ever. Or at least it was in 2004, but central bankers haven't exactly become less assertive since then, have they?
The 2004 "Great Moderation" speech may be the best evidence you'll find that central bankers can really mess things up. It combines a total rejection of policymaking in the 1960s and 1970s with an analysis of the next two decades that we now know was no less foolish than the '60s and '70s policies.
So, before taking in the confidence that Bernanke will surely project on Wednesday, it's worth considering the misguided conclusions of days past - from the 1920s to recent times.
One more link
It wouldn't hurt to also check in with one guy who actually excelled as Fed Chairman (with apologies to William McChesney Martin, who did very well in the 1950s). Click here for Paul Volcker's thoughts on ideas entertained by central bankers today.