Pow­ell voiced con­cern back in 2013 over QE

Fear that Fed’s bond buys were warp­ing mar­ket

National Post (National Edition) - - FI­NAN­CIAL POST - Rich MilleR and chRisto­pheR con­don

WASH­ING­TON •U.S.Fed­eral Re­serve chair­man Jerome Pow­ell voiced con­cern that the cen­tral bank’s bond pur­chases were dis­tort­ing fi­nan­cial mar­kets and pushed for an early start to re­duc­ing them back when he was a gover­nor in 2013, tran­scripts of meet­ings that year show.

Pow­ell, who took over as chair in Fe­bru­ary 2018, had ad­vo­cated be­gin­ning to scale back the Fed’s quan­ti­ta­tiveeas­ing pro­gram as early as June of 2013, ac­cord­ing to the record of pol­icy-mak­ers’ con­ver­sa­tions re­leased Fri­day with their cus­tom­ary five-year lag.

The cen­tral bank didn’t ac­tu­ally be­gin to cut back its pur­chases un­til De­cem­ber, af­ter the mar­kets were spooked in the mid­dle of that year by hints the plan would start sooner — the so­called ta­per tantrum.

“I believe that we ought to take the next plau­si­ble op­por­tu­nity re­duce the pace of pur­chases, and I hope that time will come in June,’’ Pow­ell said at the Fed­eral Open Mar­ket Com­mit­tee’s April 30-May 1, 2013 meet­ing.

The re­lease of 2013 tran­scripts comes as the Fed presses ahead with an on­go­ing re­duc­tion of its bond hold­ings by a max­i­mum of US$50 bil­lion per month. Some crit­ics have charged that the strat­egy has led to tur­bu­lence in the fi­nan­cial mar­kets by sug­gest­ing that the Fed will push ahead with tight­en­ing mon­e­tary pol­icy re­gard­less of the econ­omy.

While Pow­ell has played down the sig­nif­i­cance of the bal­ance-sheet roll-off, he’s left open the pos­si­bil­ity the Fed would al­ter it if nec­es­sary.

In com­ments rem­i­nis­cent of some of the com­plaints now be­ing made by the Fed’s crit­ics, Pow­ell warned back in Jan­uary 2013 that QE was warp­ing fi­nan­cial mar­kets.

“There’s also rea­son to be con­cerned about the grow­ing mar­ket dis­tor­tions cre­ated by our con­tin­u­ing as­set pur­chases,’’ Pow­ell said at the Jan. 29-30 FOMC meet­ing. While he didn’t think a crash was im­mi­nent, “there is ev­ery rea­son to ex­pect a sharp and painful cor­rec­tion.’’

Pow­ell has since ac­knowl­edged that some of the fears he had about as­set pur­chases back then didn’t ma­te­ri­al­ize. While “it was ap­pro­pri­ate to raise them, they didn’t re­ally kind of bear fruit,’’ he told economists in At­lanta on Jan. 4. “We didn’t see high in­fla­tion, we didn’t see as­set bub­bles.’’

In May 2013, then-Fed chair Ben Ber­nanke helped set off a surge in Trea­sury yields when he hinted pub­licly at the pos­si­bil­ity the U.S. cen­tral bank would start think­ing about ta­per­ing the monthly rate of bond pur­chases it was mak­ing un­der the QE pro­gram it had launched in Septem­ber 2012. In­vestors saw his com­ments as also herald­ing a rise in in­ter­est rates from near zero lev­els.

Pow­ell re­acted to the tantrum by sug­gest­ing Fed pol­icy-mak­ers had failed to pro­vide a strong enough jus­ti­fi­ca­tion for why they were con­sid­er­ing a slow­down and how lim­ited the planned change would be.

“The first re­duc­tion should be seen as a cal­i­bra­tion and an ac­knowl­edg­ment of ma­te­rial progress on the road to full em­ploy­ment,” Pow­ell said at the June 18-19 meet­ing. “In­stead, we have let the mar­ket see it as per­haps a sig­nal that we’re mov­ing to end the pro­gram and raise rates. We’ve let it be­come too im­por­tant.”

He said it was up to Ber­nanke get the Fed’s mes­sage across in the press con­fer­ence that fol­lowed the meet­ing.

“Go­ing for­ward to­day, much rests on the shoul­ders of the Great Com­mu­ni­ca­tor,” said Pow­ell, re­fer­ring to Ber­nanke. “It’s ap­pro­pri­ate to give LeBron the ball at the end of the game,’’ he added, re­fer­ring to U.S. bas­ket­ball great LeBron James.

Now, of course, Pow­ell finds him­self play­ing the LeBron role for the FOMC. And judg­ing by the wild mar­ket swings in re­sponse to his bal­ance-sheet re­marks in re­cent weeks, the Fed is still hav­ing trou­ble ex­plain­ing its strat­egy on that front — and what it means or doesn’t mean for short-term in­ter­est rates.

The in­di­ca­tor de­cel­er­ated to 2.8 per cent at the start of 2018, then dropped to 2.6 per cent and 2.3 per cent in the quar­ters that fol­lowed.

Three per cent is seen as a magic num­ber for wage growth. It’s a pace that both keeps up with in­fla­tion and leaves work­ers with a lit­tle some­thing ex­tra. Canada got there, but couldn’t hold on. An­drew Scheer, the Op­po­si­tion leader, ap­peared to be onto some­thing with po­lit­i­cal mes­sag­ing that em­pha­sized that Cana­di­ans should be do­ing more than just get­ting by.

Scheer’s choice of rhetoric might have been telling us some­thing about the econ­omy.

It was tempt­ing to dis­miss the Con­ser­va­tive twist on pos­i­tive eco­nomic num­bers; record-low unem­ploy­ment is record-low unem­ploy­ment, af­ter all. But con­sider where the party’s au­di­ence lives. Its base is in Al­berta and ru­ral Canada, and wage growth in those places has been dis­pro­por­tion­ately weak, es­pe­cially

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