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SAN FRAN­CISCO: Fed­eral Re­serve Chair­man Jerome Pow­ell, in his early days on the US cen­tral bank’s board of gov­er­nors, ar­gued fre­quently and force­fully for an end to the bond pur­chases un­der­taken to sup­port the re­cov­ery from the fi­nan­cial cri­sis, tran­scripts of pol­icy meet­ings from 2013 re­leased on Fri­day showed.

Pow­ell, who joined the board in May 2012 when Ben Ber­nanke was Fed chief, ad­vo­cated in Jan­uary 2013 for a plan to ta­per bond pur­chases, “end­ing them be­fore year-end, whether or not we see a sub­stan­tial im­prove­ment in the labour mar­ket,” ac­cord­ing to the tran­script from that month’s meet­ing of pol­i­cy­mak­ers.

The Fed did an­nounce a plan to slow its pur­chases later that year, but not be­fore global fi­nan­cial mar­kets en­dured months of tur­bu­lence in what has be­come widely known as the “ta­per tantrum.”

Pow­ell suc­ceeded Janet Yellen as Fed chief in 2018.

The re­lease of the tran­scripts from the Fed’s eight pol­icy meet­ings in 2013 gives more in­sight into pol­i­cy­mak­ers’ think­ing and de­lib­er­a­tions dur­ing and af­ter the 20072009 fi­nan­cial cri­sis and re­ces­sion.

The year 2013 marked a turn­ing point in Fed pol­icy as it took its first steps to end the mas­sive sup­port it had pro­vided, in­clud­ing cut­ting in­ter­est rates to near zero and ac­cu­mu­lat­ing more than $4 tril­lion in bonds and mort­gage­backed se­cu­ri­ties.

The bond-pur­chase pro­gramme, known as quan­ti­ta­tive eas­ing and de­signed to keep a lid on long-term bor­row­ing costs to help stim­u­late the econ­omy, was hugely con­tro­ver­sial and had its crit­ics within the Fed it­self.

What to do about the Fed’s bal­loon­ing bal­ance sheet stood out as the over­ar­ch­ing de­bate in the US cen­tral bank’s closed-door meet­ings that year.

That same is­sue re­ver­ber­ates to­day, high­light­ing the com­plex­ity of manag­ing its mas­sive port­fo­lio - and now get­ting rid of a large por­tion of it - with­out dis­rupt­ing mar­kets. A key source of ten­sion, then as now, was that the Fed saw one path for­ward, and the mar­kets saw some­thing en­tirely dif­fer­ent.

Last month, Pow­ell sent mar­kets tum­bling with a mes­sage that the bond-shed­ding pro­gramme is on “auto pi­lot” and then. Last week, he sent mar­kets soar­ing when he said the Fed was lis­ten­ing to con­cerns and would be flex­i­ble.

The ta­per tantrum was trig­gered in May of 2013 when Ber­nanke told law­mak­ers the Fed could “take a step down in our pace of pur­chases” in com­ing meet­ings. The state­ment sent bond yields rock­et­ing higher and stocks lower, and re­sulted in a tight­en­ing of fi­nan­cial con­di­tions that caught Fed of­fi­cials by sur­prise.

The 2013 tran­scripts show Fed of­fi­cials gen­er­ally, and Pow­ell specif­i­cally, mis­judged mar­kets ahead of the ta­per tantrum.

At the Fed’s April 30-May 1 pol­icy meet­ing, Pow­ell told col­leagues he would be ar­gu­ing for a ta­per in June as long as eco­nomic data con­tin­ued to im­prove, and he voiced con­fi­dence that mar­kets would take it in stride.

“This is not an un­man­age­able thing in the con­text of rea­son­able eco­nomic data,” he said. “This is not go­ing to be done in a way that pro­vokes a mas­sive re­ac­tion of shock from the mar­ket.”

Ul­ti­mately, Fed pol­i­cy­mak­ers put off an­nounc­ing the plan to slow the bond pur­chases un­til their fi­nal meet­ing of the year in De­cem­ber, set­ting in place a pro­gramme to wind them down “me­chan­i­cally” over the fol­low­ing year.

Even as they ap­proached that an­nounce­ment, Fed of­fi­cials were at odds over what mes­sage they would be send­ing by re­duc­ing eco­nomic stim­u­lus at a time when unem­ploy­ment was still rel­a­tively high, with some ar­gu­ing it would be im­pos­si­ble not to leave the pub­lic con­fused, ac­cord­ing to the tran­scripts.

Pow­ell, a lawyer by train­ing and a Wall Street vet­eran be­fore join­ing the cen­tral bank in 2012, said that be­tween the ef­fects of the ta­per tantrum, the Fed’s de­ci­sion not to ta­per in Septem­ber, and some con­fus­ing sig­nals in eco­nomic data, in­vestors now thought any move by the Fed would be months down the road - with risks build­ing in the fi­nan­cial sec­tor.

“When the com­mit­tee does ta­per, there may, again, be a sig­nif­i­cant re­ac­tion as in­vestors un­wind spec­u­la­tive trades,” he said at the Oct.29-30 meet­ing.


Pow­ell has since changed his think­ing about the Fed’s bond pur­chases, ac­knowl­edg­ing that the risks he and oth­ers saw in the pro­gramme did not ma­te­ri­alise. He now says he be­lieves the pur­chases were fun­da­men­tal to avoid­ing an even worse eco­nomic down­turn, and that the Fed would be ready to do it again in a se­ri­ous re­ces­sion.

The Fed’s pol­icy-set­ting com­mit­tee re­leases a state­ment at the end of its eight meet­ings each year. Min­utes of each meet­ing with more de­tail on the de­lib­er­a­tions but with­out in­di­vid­u­als iden­ti­fied are re­leased three weeks af­ter each meet­ing.

The tran­scripts from all of the meet­ings in a year are re­leased six years later, usu­ally in Jan­uary.

Should po­lit­i­cal dead­lock in Wash­ing­ton again bring the world’s big­gest econ­omy to the brink of a debt de­fault, the US cen­tral bank has a play­book that in­cludes op­tions one pol­i­cy­maker once la­beled “loath­some,” but, per­haps, nec­es­sary.

The pol­i­cy­maker was Jerome Pow­ell, now the Fed­eral Re­serve chair­man and a Fed gover­nor in Oc­to­ber 2013 when a po­lit­i­cal de­bate over Fed­eral spend­ing brought the coun­try to the verge of reneg­ing on tril­lions of dol­lars of fi­nan­cial obli­ga­tions.

To pre­pare for that pos­si­bil­ity, two Fed staffers penned a memo out­lin­ing nine ac­tions the Fed could take if fail­ure to raise the US debt ceil­ing trig­gered a debt de­fault.

Fed Chair­man Ben Ber­nanke then con­vened a video­con­fer­ence with fel­low pol­i­cy­mak­ers, a tran­script of which was among a trove of Fed doc­u­ments from that year pub­lished Fri­day, the 21st day of a par­tial gov­ern­ment shut­down that has re­vived mem­o­ries of 2013, when gov­ern­ment fund­ing lapsed for more than two weeks amid a pro­tracted debt cri­sis.

Op­tions in­cluded sev­eral that pol­i­cy­mak­ers read­ily sup­ported, in­clud­ing ex­pand­ing on­go­ing bond pur­chases and pro­vid­ing emer­gency lend­ing.

Two were far more con­tro­ver­sial: pur­chas­ing Trea­suries with de­layed coupons in an ef­fort to take them out of the mar­ket, and swap­ping Trea­suries that weren’t in de­fault for those that were. Those ac­tions, Pow­ell warned, would carry huge “in­sti­tu­tional risk.”

“The eco­nomics of it are right, but you’d be step­ping into this dif­fi­cult po­lit­i­cal world and look­ing like you are mak­ing the prob­lem go away,” he said.

Sev­eral pol­i­cy­mak­ers, in­clud­ing the fu­ture Fed chief Janet Yellen and cur­rent New York Fed chief John Wil­liams, ar­gued the fall­out of a de­fault would be so ter­ri­ble that the Fed would need to take all pos­si­ble ac­tion, how­ever “re­pug­nant,” in the words of Bos­ton Fed Pres­i­dent Eric Rosen­gren. Pow­ell ul­ti­mately agreed the op­tions should re­main on the ta­ble.

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