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 nick.timiraos@wsj.com
(END) Dow Jones Newswires
January 11, 2019 18:00 ET (23:00 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.