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Powell Privately Voiced Concerns -- WSJ

6 Jan 2018 7:32 am
By Nick Timiraos 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 6, 2018).

Federal Reserve governor Jerome Powell guardedly supported an aggressive expansion of the Fed's controversial bond-buying program in 2012 and expressed reservations behind closed doors about longer-term risks, according to transcripts of central bank policy meetings released by the bank on Friday.

Mr. Powell joined the board in May of that year and has been tapped by President Donald Trump to succeed Fed Chairwoman Janet Yellen next month. Because he voted consistently to support the policies of former Fed Chairman Ben Bernanke and later Ms. Yellen, markets expect he wouldn't deviate significantly from the Fed's current policy path to gradually raise rates.

The materials released Friday reveal for the first time his greater caution in 2012 about aggressively deploying unconventional policy tools compared with Mr. Bernanke and Ms. Yellen, who forcefully warned about the risks if they failed to do everything in their power to boost hiring.

The release of 2,167 pages of transcripts and other materials from eight meetings of the Fed's rate-setting committee, published with the customary five-year lag, provide the first verbatim public record of what individual officials and staffers said during the policy discussions. Until now, their comments have only been summarized in the minutes released three weeks after each meeting, without identifying any speakers by name.

The transcripts include Mr. Powell's first five meetings, during which officials debated plans to unleash a third round of bond purchases aimed at boosting the then-fitful U.S. economic recovery.

Mr. Powell, a former private-equity executive, is set to become the first non-economist in four decades to lead the Fed. His concerns about expanding the bond-buying program imply greater caution about making big or sudden moves and suggest he may be more attuned to how financial markets respond to policy decisions than his predecessors.

In his discussions on the economy, Mr. Powell often related anecdotes about how industrial companies and the finance industry viewed growth prospects, and he frequently complimented the quality of Fed staff memos that grounded the policy discussions.

The Fed in 2008 launched the first of three rounds of bond purchases aimed at stabilizing markets and lowering long-term interest rates. The untested move drew criticism from some economists and lawmakers that the central bank was risking a surge in inflation. In the end, the economy and the labor market continued to strengthen, while inflation remained under control.

Despite his early misgivings, Mr. Powell by 2015 had fully embraced the view that the central bank should be prepared to take aggressive and sustained action to boost growth and fight recessions.

"Let's let the data speak: The evidence so far is clear that the benefits of these policies have been substantial and that the risks have not materialized," he said in a speech in February 2015. Last year, he said the Fed should be prepared to employ bond purchases again to support the economy if it is in dire shape and doesn't respond to interest-rate cuts.

The 2012 transcripts show Mr. Powell indicated greater skepticism about the benefits of resuming bond purchases, but he also backed efforts to target those purchases toward boosting a nascent housing rebound by buying more mortgage-backed securities.

Some conservative economists and GOP lawmakers have objected most strongly to the Fed's mortgage-bond purchases because they said targeting one particular sector of the economy -- in this case, housing -- amounted to credit decisions better left to fiscal policy makers in Congress and the executive branch.

In August 2012, as more Fed officials including Ms. Yellen pushed for renewed stimulus to boost flagging growth, Mr. Powell said the bar for another round of bond-buying hadn't been met.

He said he was "coming around to the view" that risks cited frequently by Wall Street investors, including inflation and the difficulty of exiting from the bond buying program, could be managed. But he raised other concerns, such as that the purchases might one day lead to accounting losses on the Fed's holdings.

In September, the Fed announced the beginning of its third bond-purchase campaign, which was its most controversial because it made open-ended purchases of mortgage bonds, and later, Treasurys. The program was designed to drive down long-term interest rates and push investors into other assets, like stocks.

At the meeting, Mr. Powell believed the proposal would boost sluggish economic growth but voted to proceed "with a certain lack of enthusiasm." He added, "I am somewhat uncomfortable with the road that we are on."

The decision to purchase assets in 2012 differed from the crisis-fighting stance of 2008 and 2009, he said, because the Fed was now resorting to such stimulus as "a straightforward jobs program."

He added, "There is no credible threat of deflation, recession or financial crisis, any of which could present a compelling case for action and the use of all of our tools."

Mr. Powell said his reservations focused on the mid-to-long term and not the next six months. "My concern is that for very modest benefits, we are piling up risks for the future and that it could become habit forming," he said.

By contrast, Ms. Yellen, then the Fed's vice chairwoman, said the benefits of stronger hiring easily outweighed potential costs. "These concerns pale in comparison to what I view as the potential economic and human costs of failing to reduce the unemployment rate as aggressively as we can," Ms. Yellen said.

At the Fed's October meeting, Mr. Powell said he was concerned Wall Street broker-dealers were now projecting the Fed's balance sheet would swell from $2.8 trillion to $4 trillion by early 2014.

"Why stop at $4 trillion? The market in most cases will cheer us for doing more," he said. "Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated." He also said officials were "way too confident" they could smoothly slow or unwind those purchases once they were ready to do so.

By December, officials voted to increase the purchases to $85 billion a month, with $40 billion in mortgages and $45 billion in Treasurys. Mr. Powell again supported the move, but he said he would have preferred focusing more heavily on buying mortgages and worried again about the drawbacks of a larger balance sheet.

His concerns again stood in contrast to Ms. Yellen, who cautioned against thinking there were any "riskless policy options" and against repeating the mistakes of the Bank of Japan in its long-running battle against price declines, or deflation. She said officials there, over the past 15 years, had been too hasty to withdraw stimulus at every "whiff of recovery," prolonging their problems.

While Ms. Yellen acknowledged accounting losses from the balance sheet could one day damage the Fed's reputation and political independence, she added, "prolonged failure to meet the central bank's mandate" of stable inflation and low unemployment "can be just as damaging."

Some concerns about the potential for market instability and difficulty communicating the Fed's plans to exit from the purchase programs materialized in May 2013. When the Fed discussed plans to pare its bond purchases that spring, a tumble in bond prices sent yields soaring, in what was called the taper tantrum.

The Fed stopped adding to its balance sheet in 2014 but continued until last October to reinvest the principal of maturing bonds to keep its holdings steady, at around $4.5 trillion. Ms. Yellen successfully launched the Fed's strategy to slowly shrink the portfolio last fall -- so far, without causing a rerun of the taper tantrum -- by allowing some assets to mature. The Fed doesn't plan to sell holdings outright.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

January 06, 2018 02:32 ET (07:32 GMT)

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