The Federal Reserve is charged with maintaining the public’s confidence in the value of the dollar by keeping prices from rising too quickly. At the same time, the country’s central bank must ensure that people who want to work can generally find work to do. These two duties, preventing inflation and unemployment, are known as the dual mandate. They have been Chairman Ben Bernanke’s responsibility for the past eight years until today, the final day of his term.
The interactive graph above from Reuters shows how the chairs of the Federal Reserve have managed inflation and unemployment historically. This isn’t easy. If unemployment falls too low, then inflation can result as firms compete with each other to hire workers, leading to higher wages and higher prices generally. If inflation remains persistently low, then firms will hesitate to hire workers, leading to unemployment. That’s because as the dollar value of goods and services increases, wages and revenues rise relative to any amount of money consumers and businesses might have borrowed in the past. Inflation makes paying off debts easier, which in turn allows everyone to spend more freely. With low inflation or deflation, spending and, consequently, hiring can be depressed.
That has been the situation under Bernanke’s leadership since the financial crisis, despite his extraordinary and inventive efforts to stimulate the economy. In the graph above, periods of higher inflation are represented to the upper left, while periods of high unemployment are to the upper right. The path Bernanke charted at the central bank’s helm through this treacherous territory is shown in orange. When he took over from Alan Greenspan in February 2006, inflation was at 3.6 percent, and unemployment was under 5 percent. The orange line wobbles around in that neighborhood for a while before falling quickly down and to the right, as the rate of inflation plummeted in the summer of 2008. By the next year, the economy had crossed over into a period of deflation, and prices were falling. Meanwhile, unemployment was climbing — represented by the orange line’s movement upward and to the right of the graph. By the fall of 2009, unemployment had reached 10 percent.
Bernanke failed to recognize the crisis developing, but once he realized how serious the situation was, he persuaded the other members of the board to engage in a highly unconventional program of monetary stimulus. Unemployment gradually declined again (to 6.7 percent last month), though part of that decrease was a result of demographic changes in the workforce.
Click below to watch U.S. unemployment and inflation fluctuate over the years since 1970.
Read more: http://knowmore.washingtonpost.com/2014/01/31/heres-how-bernanke-stacks-up-against-his-predecessors/