My Lunch with Ben Bernanke

November 27, 2018  | By Kevin Smith

Ben Bernanke can smile… and he is actually kind of funny. The perfectly formal and stiff Bernanke we remember from appearances during his tenure at the Fed spoke freely with occasional wit and humor at a November 2018 lunch meeting in downtown Austin.

These are some of his insights from my notes:

• Inflation outlook.  He expects moderate inflation to continue, allowing Fed to gently increase rates further. The likelihood of an inflation spike is low.
• Growth cycle. Already slowing, the boost from Trump tax cuts will wear off by 2020 and likely turn to a negative for growth.
• China. Their goal is more stable long term growth, which requires decreasing debt and a shift from infrastructure as the growth engine to building up services, technology and financial sectors. The trade-off is lower growth now. US tariff impacts are mixed.
• US financial stability. Ben admits this is difficult to forecast, but sees the banking system as much stronger than in 2008 and much less risk of domino-effect loan defaults. He discussed new emphasis on stability and committees created to stay on top of it.
• What will the Fed do? He sees a case for ‘normalizing’ rates while inflation is low, expects a 2.75% Fed Funds target rate by mid 2019, and then a pause. He is concerned that unemployment is too low.
• Flat yield curve (short term rates similar to long term rates). This has been a fairly reliable indicator of economic slowdowns, but Bernanke thinks it is artificially flat because of the Fed’s long term debt buying spree (has kept long term rates low).
• What about our giant pile of debt? He sees higher interest rates on the federal debt reducing the power of the Fed’s available tools and may force hard choices.
• Politics. Ben insists that the Fed is not political and that current members will not be influenced by President Trump’s pressure. He also claims the Fed is not concerned with stock market prices. The Fed’s goal is stable economic growth and moderate inflation.

Ben Bernanke took unprecedented action during his tenure to combat the Global Financial Crisis. His primary tool was buying bonds and other loans from banks to keep interest rates low and provide liquidity to the banking system. You can see this massive change in the amount of assets owned by the Fed in 2018 and beyond. Economists wrestle over what will happen as the Fed ‘unwinds’ its positions.

– Kevin X. Smith, CFA