An Urban's Rural View

Say goodbye to Ben Bernanke. January 31 was his last day as chairman of the Federal Reserve Board. Farmers and agribusinesses may miss him.

Thanks to his policies, they've enjoyed years of low interest rates and export-friendly dollar exchange rates. They may not fare as well these next few years. The task for Janet Yellen, Bernanke's successor, will be to continue unwinding the Fed's massive effort to stimulate the economy by buying bonds. Over time this unwinding will likely bring a stronger dollar and higher interest rates.

A student of the Great Depression of the 1930s as an academic economist, Bernanke was well positioned to lead the Fed after the 2008 financial crash, when deflation posed a bigger threat than inflation. Years earlier he had famously said that the way to fight deflation is to drop dollars from a helicopter. "Helicopter Ben," as he became known as a result, basically followed his own advice as chair, buying bonds by printing money at a furious pace.

How will history judge Bernanke's eight years as the Fed's head? His fans credit him with saving the economy and the financial system from the crash and keeping it alive in the years since with innovative measures. His critics fault him for not anticipating the crash, for failing to regulate banks more strictly and for quadrupling the Fed's balance sheet to $4 trillion.

According to The Wall Street Journal, 40% of the public approves of Bernanke's performance, 35% disapprove and 25% have no opinion. Economists the newspaper surveyed at the end of Bernanke's term gave him a "solid B."

How historians judge him will partly depend on how well Yellen executes the unwinding. His "quantitative easing" will look more defensible if it can be unraveled without major shocks to the economy and the financial system.

In December the Fed voted to begin progressively reducing its $85 million a month in bond purchases. With the cuts made in December and January the monthly purchases are now down to $65 billion and the Fed is on track to end the stimulus program later this year.

Will the economy and the markets adjust? Already the Fed's tapering has contributed to investors' pull back from risk, as seen in the recent flight from emerging markets and the decline in U.S. stocks. But with GDP continuing to rise and the jobless rate coming down, this seems like a reasonable time for the Fed to start pulling back.

Unlike most central banks, which are preoccupied with inflation, the Fed is legally required to fight unemployment as well. Bernanke took the duality of that mandate seriously. Yellen almost certainly will, too, even as she continues the tapering and unwinding. Unless the economy grows far faster than expected, the tightening will likely be gradual. Interest rates are expected to stay low a good while longer.

But go up they eventually will. As we bid Bernanke farewell, it's good to remember that no Federal Reserve chief can keep interest rates at historic lows forever.

Urban Lehner

urbanity@hotmail.com

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