The Bernanke Fed and Its Predecessors: A Fundamental Comparison

The Bernanke Fed and its Predecessors: A Fundamental Comparison                Ben Bernanke, former Princeton University scholar, took office as Federal Reserve Board Chairman February 1, 2006.  Facing alternatively an expanding, then deteriorating, economy, he has held office sufficiently long for meaningful comparisons to be made with earlier Federal Reserve regimes.                During the current crisis, he has taken the opportunity afforded him to initiate more creative programs than, perhaps, any Federal Reserve Chair, from the unique involvement of the Fed with Bear Stearns and AIG to the formulation of the term auction facility and the primary dealers credit facility.  Evaluation of those initiatives, however, is beyond our purview as we seek to examine the response of the Bernanke Fed to more standard challenges to include inflation and unemployment, as well as asset price and risk changes.                Since becoming Board Chair, Bernanke’s words suggest change in his approach to inflation-only targeting and asset-bubble popping.  As opposed to his views as an academic in support of inflation targeting, he recently stated that he and his Fed colleagues strongly support, on an equal footing, the dual mandates of price stability and maximum employment (Bernanke, Cato Journal, 2008).  As an academic, he vigorously opposed the concept of popping bubbles in the stock and housing markets, but he pushed through a between-FOMC meetings cut in the federal funds rate in January 2008, following a sharp drop in global stock markets, and later indicated a possible need for change in the Fed’s approach to asset price bubbles (comments following October 15, 2008 speech).                Ad hoc assessments of such events, however, could provide a misleading interpretation of the policies of the Bernanke Fed over time.  Thus, we employ an enhanced Taylor Rule to examine systematically this Fed’s actions and compare it to previous regimes dating to the William McChesney Martin era.  Data on inflation, unemployment, stock prices and risk, as measured by certain interest rates, are readily available.  Housing price data are somewhat more difficult to acquire.  Our results will be reflected in the coefficients that provide the basis for regime comparison.