Jerome Powell, in his days on the Fed board before he was elevated to the chairmanship, urged Ben Bernanke to announce a pullback in efforts to stimulate the economy, even though he sensed that there might be more than a little bit of volatility in financial markets, according to transcripts of the 2013 Federal Reserve meetings released Friday.
“We’ve got to jump,” Powell told Bernanke and his colleagues.
At issue was the third round of the Fed’s asset purchase program, known as QE3, that had been underway since the prior September. The Fed was buying $85 billion a month in Treasuries and mortgage-backed securities in an open-ended program.
Outside of public view, Powell was one of the “three amigos” who were growing uncomfortable with the purchases. “As Jay told me, we needed an ‘off ramp,’” Bernanke recounted in his memoir, “The Courage to Act.” Powell pressed for an “off ramp.”
This view of “tapering” asset purchases gained increasing support from Fed officials in the early months of 2013, but the market remained largely unaware.
The Fed came up with a plan where Bernanke would mention during his press conference that the central bank planned to reduce the asset purchases later in 2013.
Bernanke said in principle the market reaction should be positive, on the grounds that uncertainty is being reduced.
“However, any conversation that starts off by saying how we are going to be cutting the rate of purchases is probably going to have some short-term negative impact,” he said, according to the transcripts.
“The more time I’ve spent with markets, the less I believe in my own ability to predict them.”
Powell was enthusiastic despite the risks. He said it was time to give the market “a road map of our thinking on reducing purchases” because the Fed was still buying assets even though the economy was improving.
“The only question is, to which roof are we going to jump, across which alley? So there is no risk-free path. This is the best path, and I’m happy that we’ve landed on it,” he said. “I’m not concerned about a little bit of volatility, but I have to say I am concerned that there may be more than that here,” Powell said, adding he was frustrated in his attempts to gauge market reaction.
“The more time I’ve spent with markets, the less I believe in my own ability to predict them,” Powell said.
Bernanke’s announcement hit the market like a thunderbolt. Stocks
plummeted and bond yields
spiked by as much as a full percentage point. The episode became known as the “taper tantrum.”
The episode fundamentally altered the way the Fed conducted balance sheet policy.
In 2016, then Fed Chairwoman Janet Yellen cited the taper tantrum as a reason not to tighten monetary policy by allowing its balance sheet to shrink. Instead, the Fed turned to raising its traditional tool of short-term interest rates.
Only after rates were higher, did the Fed start a program to shrink its asset purchases.
The transcripts, which are released by the Fed every year after a five-year delay, show that doves at the June meeting argued for a delay in announcing a reduction in the purchases.
“I don’t see the situation as being an emergency at this stage,” said Minneapolis Fed President Narayana Kocherlakota.