The Federal Reserve has a "much more difficult job" in trying to keep inflation in check due to a round of U.S. tax cuts, former Fed Chairman Ben Bernanke said June 7.
Bernanke said the tax cuts President Donald Trump signed into law, along with an increase in federal spending, will "hit the economy in a big way" in 2018 and 2019, providing a boost to already-strong growth figures. That, he said, could potentially cause the labor market to tighten at levels that would produce a higher-than-expected rise in inflation.
The economic lift will also likely go away in 2020, Bernanke added, likening it to the Wile E. Coyote cartoon character going "off the cliff" and realizing his support is gone.
"It makes the Fed's job more difficult all around because what you're getting is a stimulus at the very wrong moment, [when] the economy is already at full employment," he said at a Washington, D.C., event.
The former Fed chair spoke at an American Enterprise Institute event centered on whether the Fed's quantitative easing program has been effective. Bernanke, who oversaw the Fed's large-scale asset purchases as the central bank tried fighting off the recession, said "the great majority of studies suggest" the program boosted an economy that was otherwise heading "toward the abyss."
The Fed has since begun to gradually trim its balance sheet from a peak of $4.5 trillion. Bernanke said the central bank does not want to cause any disruption in the markets by deviating from the monthly cuts it had announced, saying any changes would need to clear a "very, very high bar."
A recent study called QE's effectiveness into question, but Bernanke argued officials "needed to do something" to prevent an even larger downturn.
He also said the ramifications that critics predicted have "simply not happened," pointing to a letter from some members of Congress that warned about hyperinflation. And while he said asset values such as stocks may be currently above historical levels, partly due to low interest rates, they are not "wildly overvalued" and reflect the economy's strength.
"A lot of that gain is not bubble," he said.
