With a year to run at Fed, Powell aims to avoid past QE mistake

With a year to run at Fed, Powell aims to avoid past QE mistake

Federal Reserve Chair Jerome Powell heads into what could be his last year atop the central bank determined not to repeat the mistake he made when he was a neophyte monetary policy maker seven years ago.

Then a Fed governor, Powell was among those leading the charge to scale back the central bank’s quantitative-easing programme —a stance that led to the economically debilitating and market-wrenching taper tantrum of 2013.

Powell, whose four-year term as chair ends in February 2022, is likely to sound more cautious this week about curbing the Fed’s massive asset purchases —even though the economic outlook has brightened further thanks to an expected big budgetary boost from President Joe Biden.

“He’ll emphasize that the risk of moving too early far outweighs the risk of moving too late,” said Lou Crandall, chief economist at Wrightson ICAP. Powell will hold a press conference on Wednesday after a two-day meeting of the Federal Open Market Committee that is expected to decide to keep monetary policy ultra-easy to fight the economic fallout from the pandemic.

As 2013 showed, getting the timing of a taper right can be critical. After then-Fed chairman Ben Bernanke suggested in May of that year that the central bank might soon begin to rein in QE, long-term interest rates shot higher, upending emerging markets and restraining the US economy. Bernanke’s comments came just weeks after an FOMC meeting in which Powell voiced hopes that the Fed might start scaling back asset purchases in June, according to a transcript of that gathering.

“Could the Fed taper without a tantrum?” JPMorgan Chase managing director John Normand and fellow strategists asked in a January 22 note to clients. Their answer: It’s “unlikely given current valuations and positioning” in financial markets.

A Bloomberg survey of economists last week revealed a wide dispersion of views about when the Fed will begin to rein in its buying. While a plurality of 35 per cent expect the taper to start in the first three months of next year, just over a quarter believe it will come in the final three months of 2021. Roughly another 25 per cent don’t see it happening until the second quarter of 2022 or beyond.

The Fed is buying a lot more bonds today than it was seven years ago. It’s currently purchasing $120 billion per month — $80 billion of Treasury securities and $40 billion of mortgage-backed debt — compared with $85 billion monthly in 2013, including $45 billion of Treasuries.

But just as was the case back then, the Fed has set a rather amorphous guideline for QE policy. In 2013, the FOMC said it would continue buying bonds “until the outlook for the labor market has improved substantially in a context of price stability.” Now it says it will purchase at least $120 billion of assets monthly “until substantial further progress has been made toward the committee’s maximum employment and price-stability goals.”

As Powell noted seven years ago, such vague guidance increases the risk that the markets misunderstand the Fed’s intentions.

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