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Home / Business / Powell sensed ‘taper tantrum,’ but urged Fed to act anyway, newly released transcripts from 2013 show

Powell sensed ‘taper tantrum,’ but urged Fed to act anyway, newly released transcripts from 2013 show





Bloomberg News / Landov

Stocks plummeted and bond yields increased in June 201
3, at a market event now known as "taper tantrum" after former Fed chairman Ben Bernanke announced plans to withdraw from efforts to stimulate the economy.

Jerome Powell, in his days on the Fed board before being raised to the presidency, urged Ben Bernanke to announce a retreat in his efforts to stimulate the economy, even though he sensed that there could be more than a little Of volatility in the financial markets, according to the transcripts of the 2013 Federal Reserve meetings published on Friday

"We have to jump," Powell told Bernanke and his colleagues.

At issue was the third round of the Fed's asset purchase program, known as QE3, which had been underway since the previous September. The Fed was buying $ 85 billion a month in Treasury bills and mortgage-backed securities in an indefinite-term program.

Outside the public view, Powell was one of the "three amigos" who were becoming uncomfortable with purchases. "As Jay told me, we needed an" exit ramp, "wrote Bernanke in his memoir," The Courage to Act. "Powell insisted on an" exit ramp ".

See: Jerome Powell Fed means for investors and the economy

This view of purchases of "tapered" assets has received increasing support from Fed officials in the early months of 2013, but the market remained largely unaware.

The Fed drew up a plan where Bernanke mentioned during his press conference that the central bank was planning to reduce asset purchases in 2013.



Reuters [19659002] Fed Chairman Powell with former Fed presidents Janet Yellen and Ben Bernanke

Bernanke said the market should in principle be positive, based on the fact that uncertainty is shrinking.

"However, any conversation which starts by saying we are going to reduce the rate of purchases will likely have a negative short-term impact, "he said, according to the transcripts.

"The more time I spent with the markets, the less I believe in my ability to predict them."


Jerome Powell, then governor of the Fed and now his president

Powell was enthusiastic despite the risks. He said it was time to give the market a "road map of our thinking about reducing purchases" because the Fed was still buying assets even if the economy was improving.

"The only question is, at what roof are we going to jump, through which lane? So there is no risk-free path.This is the best route, and I'm glad we landed," he said . "I'm not worried for a bit of volatility, but I have to say I'm worried there might be something more here," Powell said, adding that he was frustrated in his attempts to assess the market's reaction.

"The more time I have spent with the markets, the less I believe in my ability to predict them," Powell said.

The announcement of Bernanke hit the market like lightning. stocks

DJIA, -0.25%

collapsed and bond yields

TMUBMUSD10Y, -1.57%

is increased by one whole percentage point. The episode became known as "taper tantrum."

The episode radically changed the way the Fed conducted budget policy.

In 2016, Fed Chairman Janet Yellen cited tantrum taper as a reason not to tighten monetary policy by allowing her budget to shrink. Instead, the Fed has turned to raising its traditional short-term interest rate instrument.

Read: Yellen explains why the Fed did not cut the budget to tighten policy

Only after rates were higher, the Fed initiated a program to reduce asset purchases.

Transcripts, which are issued by the Fed each year after a five-year delay, show that doves at the June meeting have been late in announcing a reduction in purchases.

"I do not see the situation as an emergency at this stage," Minneapolis Fed President Narayana Kocherlakota said.


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