In 2013, Powell Worried Fed's Bond Buys Were Distorting Markets, Transcripts Show -- Update
By Nick Timiraos
Jerome Powell worried the Federal Reserve's bond purchases were distorting markets and encouraged his central-bank colleagues in early 2013 to signal plans to wrap up the stimulus campaign, according to transcripts of policy meetings released Friday.
Mr. Powell, who became Fed chairman a year ago, joined the central bank as a governor in 2012. He voted with other officials in September 2012 for the central bank to start buying $85 billion in bonds in an open-ended program.
He has since said the bond-buying efforts were an important policy tool for bolstering the shaky economy, and he has acknowledged that the risks to financial stability he once raised didn't materialize.
But throughout Fed's policy meetings in early 2013, he and other skeptics of the program pushed for a plan to start winding down the program that year. In January, he worried it could be fueling "bubble-like terms" in corporate finance and said the asset purchases were inflating bond prices.
"There is every reason to expect a sharp and painful correction," he said in January 2013, according to the transcripts.
The discussions are relevant today because the central bank is considering how long it should continue shrinking its portfolio of the Treasury and mortgage bonds acquired during those stimulus campaigns. Officials are also debating how monetary policy should balance financial-stability concerns in an environment in which interest rates might remain at historically low levels.
The Fed publishes a written summary of its policy meetings after a three-week delay. Transcripts of the discussions, identifying which participants made which comments, are released after more than five years.
Divisions over when and how to signal an exit from the experimental program animated discussions at most of the policy meetings that year. "Boy, there is a lot of disagreement around the table," said then-governor Daniel Tarullo at a key April 30-May 1 meeting.
One group of officials, which included Mr. Powell, pushed at that meeting for then-Fed Chairman Ben Bernanke to begin signaling the central bank would start reducing, and eventually end, the bond purchases.
"I would take the next reasonable opportunity to taper," Mr. Powell said.
He played down worries that the central bank's communication of those plans would roil markets. "This is not an unmanageable thing," he said. "This is not going to be done in a way that provokes a massive reaction of shock from the market."
Another group, which included Janet Yellen, who was then the Fed's vice chairwoman and who succeeded Mr. Bernanke as Fed chief in 2014, argued the purchases needed to continue because of signs the economy wasn't as strong as measures of unemployment and inflation might indicate.
Three weeks later, when Mr. Bernanke signaled a potential tapering of the bond purchases at a congressional hearing, markets grew confused about the Fed's intentions.
Many investors erroneously believed the central bank was also preparing to raise interest rates from near zero much sooner than anticipated, which roiled global financial markets. The event, later dubbed the "taper tantrum," sent yields on the 10-year Treasury from 1.94% on May 21, the day before Mr. Bernanke's comments, to 2.98% in September.
By the time Fed officials met on June 18, Mr. Powell said the recent market volatility could become destabilizing. "The market does not understand when we will reduce purchases or why," he said. "This is a dangerous state of affairs."
In part because of how rising borrowing costs weighed on economic activity, Fed officials delayed plans to slow the purchases until December 2013. They ended the purchases in October 2014.
By 2015, Mr. Powell had backed away from his initial reservations. The tools the Fed used in the crisis after cutting short-term rates to zero generally worked, Mr. Powell said during a question-and-answer session with Mr. Bernanke and Ms. Yellen in Atlanta last week.
"The concerns people raised -- and it was appropriate to raise them -- they didn't really bear fruit," he said. "We didn't see high inflation. We didn't see asset bubbles."
The transcripts show Mr. Powell wrestling with a long-running challenge for central bankers over whether to use monetary policy to lean against potential asset bubbles, as opposed to simply preventing outbreaks of inflation.
"Long periods of suppressed volatility can lead to the buildup of risks and to a disruptive ending," Mr. Powell said in October 2013. "The idea that monetary policy can ignore that...is not credible to me."
The Fed began shrinking its asset holdings in 2017 by allowing more bonds to mature without replacing them. The holdings have fallen from $4.5 trillion to around $4 trillion. Officials are currently discussing how to manage their portfolio once it stops shrinking.
The transcripts highlight policy makers' frustration over the difficulty explaining untested exit strategies to nervous investors. Before an important press conference in June 2013, Mr. Bernanke tried to explain to his colleagues what he would say if asked about the Fed's policy plans should the economy unfold in line with officials' forecasts.
"And my answer is, I have no idea," he said at the meeting preceding the press conference. "We really do need to have a little more clarity about this."
At the next meeting in July, then-New York Fed President William Dudley pointed to a recent survey of Wall Street banks that dinged officials for not clarifying what they were planning to do. "Our communications weren't perfect. That's an understatement," he said.
Then-governor Sarah Bloom Raskin described feedback she had received from investors after the June meeting: "Please, please, for the love of God, do not attempt to communicate again."
In October, Mr. Bernanke thanked his colleagues for their patience throughout the summer. "It's been a little bit of a bumpy ride for a while, and I bear more than 1/19th responsibility for that," he said, referring to the 19 members who participate in the Fed's policy meetings.
The transcripts underscored Mr. Powell's penchant for plain language. When officials considered minor wording embellishments to their postmeeting statement in October, Mr. Powell resisted.
"I would say, please, no," he said. "Let's resist the temptation to tinker. Less is more."
Write to Nick Timiraos at email@example.com