Bernanke Lecture
THE FEDERAL RESERVE AND THE FINANCIAL CRISIS
Lecture 2: The Federal Reserve after World War II
1. Early Challenges 2. The Great Moderation 3. Origins of the Recent Crisis
What Is the Mission of a Central Bank?
• Macroeconomic stability - All central banks use monetary policy to strive for low and stable inflation; most a so use monetary policy to try to promote stable growth in output and employment. • Financial stability - Central banks try to ensure that the nation's financial system functions properly; importantly, they try to prevent or mitigate financia panics or crises.
Fed-Treasury Accord of 1951
• During World War II and subsequently, the Fed was pressed by the Treasury to keep longer-term interest rates low to allow the government debt accrued during the war to be financed more cheaply. • Keeping interest rates low even as the economy was growing strongly risked economic overheating and inflation.
• In 1951, the Treasury agreed to end the arrangement and let the Fed set interest rates independently as needed to achieve economic stability. • The Fed has remained independent since 1951, conducting monetary policy to foster economic stability without responding to short-term political pressures.
The Fed in the 1950s and Early 1960s
• Between World War II and the recent financial crisis, macroeconomic stability was the predominant concern of central banks. • During most of the 1950s and Chairman, 1951-1970 early 1960s, the Federal [quote]"Inflation is a thief in Reserve followed a "lean the night and if we against the wind" monetary don't act promptly and policy that sought to keep decisively we will both inflation and economic always be behind." growth reasonably stable.
[end of quote.]
The Great Inflation: Monetary Policy from the Mid-1960s to 1979
Inflation
• Starting in the mid1960s, monetary policy was too easy. • This stance led to a surge in inflation and inflation expectations. • Inflation peaked at about 13 percent.
Lecture 2: The Federal Reserve after World War II
1. Early Challenges 2. The Great Moderation 3. Origins of the Recent Crisis
What Is the Mission of a Central Bank?
• Macroeconomic stability - All central banks use monetary policy to strive for low and stable inflation; most a so use monetary policy to try to promote stable growth in output and employment. • Financial stability - Central banks try to ensure that the nation's financial system functions properly; importantly, they try to prevent or mitigate financia panics or crises.
Fed-Treasury Accord of 1951
• During World War II and subsequently, the Fed was pressed by the Treasury to keep longer-term interest rates low to allow the government debt accrued during the war to be financed more cheaply. • Keeping interest rates low even as the economy was growing strongly risked economic overheating and inflation.
• In 1951, the Treasury agreed to end the arrangement and let the Fed set interest rates independently as needed to achieve economic stability. • The Fed has remained independent since 1951, conducting monetary policy to foster economic stability without responding to short-term political pressures.
The Fed in the 1950s and Early 1960s
• Between World War II and the recent financial crisis, macroeconomic stability was the predominant concern of central banks. • During most of the 1950s and Chairman, 1951-1970 early 1960s, the Federal [quote]"Inflation is a thief in Reserve followed a "lean the night and if we against the wind" monetary don't act promptly and policy that sought to keep decisively we will both inflation and economic always be behind." growth reasonably stable.
[end of quote.]
The Great Inflation: Monetary Policy from the Mid-1960s to 1979
Inflation
• Starting in the mid1960s, monetary policy was too easy. • This stance led to a surge in inflation and inflation expectations. • Inflation peaked at about 13 percent.