Federal Reserve documents 39 page

thresholds for the first rate increase—would enable us to do better.

After the March meeting, between the statement approved by the Committee and my remarks at the press conference, the message I wanted to send seemed to get through—we were seriously discussing how to wind down our purchases, but we weren’t ready to start. Or as the next day’s Wall Street Journal headline put it: “Fed Not Ready to Tighten Policy—Yet.” I knew that I had a delicate balancing act to perform. The center of the FOMC, including my three wavering Board members, was looking for a slowing of purchases sometime around midyear. Based on media reports and our surveys of securities firms, it appeared that many in the markets expected and hoped for a much later start. My job was to try to bring those differing expectations closer together, while continuing a policy that supported the recovery.

Our objective at the April 30–May 1 meeting was much the same as in March—to communicate that the economy wasn’t quite ready for us to dial back our purchases but that the time was coming. The economy was growing moderately, helped by solid consumer spending (which in turn was helped by a decline in gasoline prices) and by rising housing construction. However, as we had feared, federal spending during the first three months of the year was already declining markedly, even before the full force of the sequestration hit. In our statement, we tried to convey our flexibility and reinforce the message that our future actions would depend on how the economy evolved. We said, “The Committee is prepared to increase or reduce [italics added] the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

However, investors evidently heard only the “increase” part of the new phrase and inferred that the Committee was actively considering stepping up the pace of purchases. Stocks rallied moderately over the next three weeks. Market expectations for the future of QE3 were now less, rather than better, aligned with the expectations of most on the Committee.

I corrected the message, but sloppily, on May 22. In my opening statement to a Joint Economic Committee hearing that morning, I warned, “A premature tightening of monetary policy . . . would . . .

carry a substantial risk of slowing or ending the economic recovery.” I was pushing back against the views of hawks, inside and outside the Fed, who wanted to bring our securities purchases to a rapid conclusion. I wasn’t trying to signal that we’d continue purchasing at the current pace forever. In fact, I didn’t see a modest reduction in the rate of growth of our balance sheet as tightening; we’d still be easing monetary conditions, only less aggressively.

A short while after delivering my opening statement, in response to a question, I said, “We could in the next few meetings . . . take a step down in our pace of purchases.” That afternoon, we released the minutes of the April 30–May 1 meeting. They revealed that some FOMC participants “expressed willingness to adjust the flow of purchases downward as early as the June meeting.”

The market seesawed on what it perceived as mixed messages, though the statements, considered in their full context, were consistent. Stock prices rose on my prepared testimony, pared their gains on my comments during the question-and-answer session, and fell after the release of the minutes. The message

that QE3 couldn’t go on forever seemed, finally, to be sinking in. But the communications bumps reminded me of my rookie-season attempt to end a monetary tightening cycle in 2006 and renewed my appreciation of the difficulties encountered by Greenspan at the start of the 1994 tightening. They also reminded me of a story Dallas Fed president Richard Fisher included in one of his speeches about the early nineteenth-century French diplomat Talleyrand and his archrival, Prince Metternich of Austria. When Talleyrand died, Metternich was reported to have said, “I wonder what he meant by that?” It seemed that no matter what I said or how plainly I said it, the markets tried to divine some hidden meaning.

AFTER THE JOINT ECONOMIC COMMITTEE episode, I turned to a communications task I enjoyed far more than appearing at press conferences and congressional hearings. I traveled to two familiar places to deliver commencement remarks—Simon’s Rock College and Princeton University. Our son, Joel, had graduated from Simon’s Rock in 2006 and in 2013 was graduating from the Weill Cornell Medical College. Anna served on the Simon’s Rock Board of Overseers.

I spoke there on May 18, a beautiful, sunny day, aware that, even though the recovery was now four years old, the graduates faced a tough job market. I tried to look ahead by decades rather than quarters, and to rebut economists who contended that the advanced economies were doomed to subpar growth for a long time. I told the graduates, “Both humanity’s capacity to innovate and the incentives to innovate are greater today than at any other time in history.” In short, I tried to convince them that New York Yankees Hall of Famer Yogi Berra was wrong when he said that the future ain’t what it used to be. I had some fun with the Princeton remarks on June 2, offering the graduates ten suggestions in lieu of ten commandments. “Life is unpredictable,” I told them, thinking of both my own career path and the economy and financial system’s roller-coaster ride over the past seven and a half years. I also gave them a working definition of my chosen profession: “Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much.”

Throughout my time as chairman, I was always happy to speak with teachers and students (whether privileged Ivy Leaguers, undergraduates at a historically black college, or adults returning to community college) and to affirm the importance of lifelong education. It wasn’t just because Anna and I were both educators. Sound monetary policy, I knew, can support a healthy economy—but it can’t create one. In the long run, the economy’s ability to produce a rising standard of living for future generations depends on people having opportunities to acquire both economically valuable skills and the perspective that comes from a broad education. Nothing else matters as much.

ON JUNE 19, two and a half weeks after the Princeton baccalaureate ceremony, I sat in my office after my latest post-FOMC press conference. The elms along Constitution Avenue were in full summer leaf, but I

wasn’t looking out the window. Instead, I watched the sharp swings in the stock and bond markets playing out in jagged red lines on my Bloomberg terminal. In what became known as “the taper tantrum,” ten-year Treasury yields and the dollar exchange rate were spiking, while the Dow was sinking. The possible economic consequences were troubling: If long-term interest rates continued to rise and stock prices continued to fall, it would damp investment and consumer demand, while a rising dollar would discourage export sales of U.S. goods.

At the just-concluded meeting, the FOMC had affirmed continuing securities purchases at the pace of $85 billion per month. But many around the table also wanted to lay the groundwork for our eventual exit from the program. To accommodate them, I described at the press conference a tentative, data-dependent path for winding down the purchases. We could moderate them “later this year,” I said, if our forecasts predicted continuing improvement in labor markets and if inflation (running at about a 1 percent rate so far in 2013) was moving back toward our 2 percent target. After that, if all went well, we would continue to reduce our purchases in what I called “measured steps,” ending around the middle of 2014. At that point, the unemployment rate, at 7.6 percent in May, would likely be around 7 percent, based on our projections. Unemployment of 7 percent, while not our ultimate goal, would represent a substantial improvement relative to the 8.1 percent rate in August 2012, when markets first started anticipating QE3. I thought it was important, if possible, that we end the purchases only when we could legitimately say they had achieved their purpose.

In an attempt to blunt any market overreaction to the prospect of moderating our purchases, I had stressed at the press conference a point that had been included in FOMC statements since December—that we expected to keep monetary policy very accommodative (in other words, keep the federal funds rate target near zero) for a “considerable time” after our securities purchases ended. Finally, to alleviate any market anxiety that we might be inclined, after completing our purchases, to quickly reverse course and shrink our balance sheet, I reported that a strong majority of the FOMC now expected we would hold on to our mortgage-backed securities until they matured, rather than selling them.

I had known that any discussion of reducing purchases would likely produce at least a mildly negative reaction in the markets, but I had thought—based on the New York Fed’s surveys of securities firms—that the path I laid out was close to what markets expected. I even hoped that, by reducing uncertainty, we might produce a small positive reaction. Generally, I wasn’t greatly concerned about short-term market fluctuations, but the movements on my Bloomberg screen after the press conference were not what I had expected. If the trends persisted, it would amount to an unintended tightening of monetary conditions.

What explained markets’ strong reaction—and why did it surprise us? In retrospect, I think our view of market expectations was too dependent on our survey of securities dealers. Futures markets gave us a reliable read of where markets thought the federal funds rate was going—but not for our securities purchases. For that, economists at the New York Fed asked their counterparts at the securities firms, who paid careful attention to every nuance of Fed policymakers’ public statements. In effect, our PhD

economists surveyed their PhD economists. It was a little like looking in a mirror. It didn’t tell us what the rank-and-file traders were thinking. Many traders, apparently, didn’t pay much attention to their economists and were betting our purchases would continue more or less indefinitely. Some called it “QE-ternity” or “QE-infinity.” Their assumption was unreasonable and entirely inconsistent with what we had been saying. Nevertheless, some investors had evidently established market positions based on it. Now, like Metternich, they looked at our statements about securities purchases and asked, “What do they mean by that?” Their conclusion, despite the plain meaning of what I said at the press conference, was that we were signaling an earlier increase in our federal funds rate target. They sold their Treasury securities and mortgage-backed securities, driving up long-term interest rates.

We mobilized to correct markets’ mistaken impressions. I conferred with Jeremy Stein and Jay Powell by email and, on June 24, met with them over lunch. My next speech wasn’t till July 10, but both Bill Dudley and Jay had public appearances scheduled on June 27 and Jeremy had a speech on June 28, so they could begin clarifying our policy plans. Ten-year Treasury yields and, more importantly, thirty-year mortgage rates had jumped around a half of a percentage point in the week since the meeting, a threat to home sales and construction. The Dow Jones industrial average had fallen nearly 4 percent, and the exchange value of the dollar had risen close to 3 percent. Emerging-market economies were also suffering as investors, anticipating they could earn higher interest rates in the United States, pulled their money out.

In their speeches, Bill and Jay stressed that we would not pare our securities purchases if we thought that would hurt the economy. “If the performance of the economy is weaker, the Committee may delay before moderating purchases or even increase them,” Jay said. Bill explained that if labor market conditions fell short of the FOMC’s outlook, “I would expect that asset purchases would continue at a higher pace for longer.” Jeremy said that our policy stance hadn’t fundamentally changed. In response to a question at my July 10 speech, in Boston, I stressed that any gradual downshift in securities purchases should not be confused with tighter monetary policy in the form of an increase in short-term rates. “The overall message is accommodation,” I said. Our remarks helped. Mortgage rates and long-term Treasury rates eased a bit and stocks recovered somewhat. But markets remained jumpy.

UNFORTUNATELY, THE TAPER tantrum wasn’t the only controversy that summer. At my June news conference, Ylan Mui of the Washington Post asked me about remarks made by President Obama, aired on PBS two days earlier. Obama had told interviewer Charlie Rose that “Ben Bernanke’s done an outstanding job.” He added, “He’s already stayed a lot longer than he wanted or he was supposed to.” This comment may have reflected the president’s recollections of my mixed feelings at taking a second term and my determination to leave at the end of eight years. I ducked Ylan’s question, as I had been ducking questions about my replacement since the previous summer, when Republican presidential candidates had tried to outdo each other in saying how quickly they would fire me. (For the record, unlike cabinet secretaries in the executive branch, the Fed chairman can’t be removed from office without

cause.)

I would have liked to answer Ylan’s question, if only to avoid the false impression that I was being nudged from office. To the contrary, the president had given me no reason to think that he was dissatisfied or that his opinion of me now was any different from the one he had held when he reappointed me. Still, I avoided saying anything publicly about my plans on the advice of Michelle Smith and Dave Skidmore, who held to the tried-and-true practice that policymakers should avoid lame duck status as long as possible.

Speculation about who would succeed me reached fever pitch that summer. Most of the focus was on Larry and Janet. But others mentioned publicly included Don Kohn, Roger Ferguson, my Princeton colleague Alan Blinder, and my old thesis adviser at MIT, Stanley Fischer, who was finishing eight years as governor of Israel’s central bank. I was unhappy with the White House’s management of the process. The president and his advisers let speculation drag on week after week, to the point where I believed it threatened to damage the candidates’ reputations and perhaps even create uncertainty about the course of monetary policy. For Janet, the circus was difficult and distracting, but she continued to focus on her work. Larry, despite his close relationship with the president and his acknowledged brilliance, had some important vulnerabilities, including a history of rubbing intellectual and political opponents the wrong way. As time passed without an announcement, it seemed to me that Janet was becoming the odds-on favorite. Larry’s prospects suffered a fatal blow in late July when a third of the Senate’s fifty-four Democrats, many in the party’s liberal wing, signed a letter supporting Janet. Because the president could expect little Republican support for his nomination, he couldn’t afford to lose Democrats.

The chairmanship wasn’t the only impending personnel change at the Fed that summer. On July 11, Betsy Duke announced that she would resign from the Board at the end of August, after five eventful years. She mentioned that it had been her ambition to serve at the Federal Reserve long enough to see what normal times were like (she had joined the Board a little more than a month before Lehman), but that she had given up hope. Sarah Raskin, only the eighth woman to serve on the Board in its hundred-year history, on July 31 became the first woman nominated to serve as deputy Treasury secretary. Sandra Pianalto, president of the Cleveland Fed since 2003, announced on August 8 that she would retire early in 2014. I appreciated Sandy’s constructive, low-ego approach through the years. She listened carefully—to her colleagues on the FOMC, and also to the businesspeople, bankers, and community leaders in her district. Like Jeremy, Jay, and Betsy, she had had reservations about large-scale asset purchases. But rather than making a splash by dissenting, she worked to persuade Committee members through thoughtful, low-key arguments. She expressed her views in speeches, but without the provocative rhetoric that Tom Hoenig had employed in 2010.

The central banking cast was changing internationally as well in 2013. Masaaki Shirakawa had stepped aside in March after five years as governor of the Bank of Japan. He had been a good colleague, cerebral and constructive. He had worked hard to help Japan’s economy recover from the 2011

earthquake and tsunami. But he was also cautious and conservative, perhaps reflecting his long career at the Japanese central bank before becoming governor. His successor, Haruhiko Kuroda, the president of the Asian Development Bank and an outsider at the Bank of Japan, was seen as more in tune with the stimulative “Abenomics” policies of Prime Minister Shinzo Abe. According to press reports, he was expected to adopt more “Bernanke-like” tactics, including open-ended asset purchases and other vigorous efforts to bring Japanese inflation up to a 2 percent target.

On July 1, my old MIT colleague Mervyn King ended a decade as governor of the Bank of England. (Mervyn was knighted in 2011 and was made a life peer in 2013—making him a member of Great Britain’s House of Lords—so I occasionally addressed him, tongue in cheek, as Lord Sir King.) I attended farewell ceremonies for Mervyn both in London and at a dinner at the British embassy in Washington. His successor was Mark Carney, the well-regarded head of the Bank of Canada. Carney, in turn, was succeeded by Stephen Poloz, a former research chief of the central bank and head of Canada’s export promotion agency.

AFTER THE TAPER tantrum, monetary policy coasted into the summer. At the July 30–31 FOMC meeting, we made few changes in our statement. In my semiannual monetary policy testimony and in other venues, I continued to draw the important tactical distinction between our securities purchases and our interest rate policy. The main goal of our purchases had been to increase the economy’s near-term momentum, I said, to bring it closer to self-sustaining growth. Near-zero short-term interest rates, in turn, would support economic growth for long after the purchases ended. The plan was akin to a multistage rocket, with booster rockets launching it into space and secondary engines keeping it moving after it reaches escape velocity.

The hearings before the House Financial Services and Senate Banking committees on July 17 and 18 marked my last appearances before Congress as chairman. Many of the legislators, including some who had sharply criticized our actions, went out of their way to thank or congratulate me, particularly for the Fed’s actions during the crisis. Senator Corker, a Fed ally in much of the debate over the Dodd-Frank law but a bitter opponent of quantitative easing, said, “Thank you for your service, thank you for friendship, and whatever happens I wish you well.” Five months earlier, at the previous monetary policy hearing, he had accused me of “throwing seniors under the bus” with policies that had the side effect of keeping rates on savings accounts and certificates of deposit very low. I liked and respected Corker, a capable legislator, but I could never get used to the Jekyll-and-Hyde nature of politicians. At least Senator Corker, unlike many of his colleagues, usually said the same things to me both in private and in public.

The hearings roughly coincided with the third anniversary of the passage of the Dodd-Frank Act, and I updated the lawmakers on our ongoing efforts to implement it. It had been a long and painstaking process. In writing the new rules, we had to coordinate not only with other U.S. regulators but—to achieve as much international consistency as possible—with our counterparts abroad as well. On July 2, we and the

other U.S. bank regulatory agencies jointly adopted bank capital requirements tougher than even the higher standards established by Basel III. Since the Fed had led the first comprehensive stress tests in early 2009, the capital levels of the big U.S. banks had more than doubled. They were in a much better position to withstand economic downturns and financial turmoil and, as a result, keep lending to households and businesses. The week after we adopted the Basel III rules, the multiagency Financial Stability Oversight Council had designated the first two nonbank systemically important financial institutions—AIG and GE Capital, the financial services subsidiary of General Electric. The designations meant that they would be supervised by the Federal Reserve.

Jack Lew had been pressing the regulatory agencies, in public speeches and in private meetings at the Treasury, to pick up the pace of writing Dodd-Frank rules. On August 19, the president summoned us to the Roosevelt Room to apply a little more moral suasion. He was particularly anxious that by the end of the year we approve the Volcker rule, which banned banking companies from trading—for their own account—many securities, derivatives, and commodity futures and options. I appreciated the president’s sense of urgency, but I also wanted to get the job done right. The five agencies tasked with writing the regulations to implement the Volcker rule found it extremely challenging to distinguish permissible from impermissible trading. But we met the president’s deadline, adopting the final version on December 10.

Our constant concern, in writing regulations, was to preserve financial stability without constraining credit or economic growth any more than necessary. Two years earlier, JPMorgan CEO Jamie Dimon had asked me at a public forum whether we had calculated the cumulative economic effect of all the new rules we were putting into place. We did as a matter of course attempt to analyze the costs and benefits of individual rules, and even groups of related rules, but I told him that a comprehensive calculation wasn’t practical. My answer wasn’t very satisfying, and Jamie’s willingness to challenge me in public on behalf of his fellow bankers made him a short-lived hero on Wall Street. A better answer would have been to point out to Jamie the immeasurable economic and human cost of failing to write adequately tough rules and permitting a repeat of the crisis we had recently endured.

THE JULY HEARINGS were my last public speaking event before the September 17–18 FOMC meeting. The long hiatus complicated the task of setting expectations for whether we would start reducing our securities purchases. Normally, I would have used my August speech at the Kansas City Fed’s Jackson Hole conference to foreshadow any forthcoming policy shifts, but I had decided to play hooky. I had wanted to skip the conference the year before, too. My niece’s bat mitvah was scheduled that weekend. But Esther shifted the date of the conference for me, and I agreed to attend. In retrospect, that was a good outcome. The media might have interpreted my absence as a slap at Esther in her first year hosting the conference— a message I definitely did not want to send. Still, my concerns about the conference were broader. It had become a media circus. Moreover, I thought it unfair that one Reserve Bank out of twelve should be the permanent host and agenda-setter of what had become the Fed’s flagship conference.

Instead of Jackson Hole, Anna and I went on a five-day vacation, our first since I had been forced to cancel our trip to Myrtle Beach in August 2007. We visited family in Charlotte and went, just the two of us, to Asheville, North Carolina. We toured the Biltmore Estate, the largest privately owned house in the United States, and enjoyed the gardens designed by the famed Frederick Law Olmsted, the designer of New York’s Central Park. We also took in some bluegrass music at a local dive in Asheville.

I was a little worried that skipping Jackson Hole would create a communications problem, but as it turned out the economic tea leaves were mixed and I wouldn’t have been able to send a clear signal in any case. Despite the economic cross-currents, as the September meeting neared, market participants seemed increasingly to expect that we would, finally, start the proverbial taper. Two-thirds of the forty-seven economists surveyed by the Wall Street Journal during the week before the meeting predicted action.

On the eve of the meeting, I did not think the case was nearly that clear. The unemployment rate had edged down further in August, to 7.3 percent. But job growth looked to have weakened, with payroll increases averaging only 136,000 a month in July and August. I was also concerned that financial conditions were tightening too quickly. Thirty-year mortgage rates had leapt from less than 3.5 percent in May to a bit more than 4.5 percent. Other long-term interest rates had risen, too. Meanwhile, Congress and the president appeared headed for a showdown over legislation needed to raise the debt ceiling and fund government operations after the 2014 fiscal year began on October 1. I knew from our experience in 2011 that, at best, the brinkmanship would hurt confidence and, at worst, a default on Treasury securities could create tremendous financial upheaval.

The Committee split between members favoring a modest reduction in monthly purchases, say from $85 billion to $75 billion, and members who wanted to delay. Backed strongly by Bill Dudley and Janet Yellen, I recommended that we hold off in spite of market expectations for a reduction. I noted that, in June, I had never said that we would taper in September; I had only said “later this year.” But more fundamentally, the economic outlook did not yet clearly justify reducing purchases. I wanted to send a strong message that our policy would depend on the outlook for the economy and the job market. After all, standing ready to do whatever it takes had been the whole point of open-ended securities purchases. The FOMC supported my recommendation, with only Esther George dissenting, as she had all year. Jeremy Stein joined the majority but said in a speech the next week that he would have been comfortable with starting to taper right away.

After years of trying to telegraph our moves, we surprised markets by doing nothing in September. The surprise eased the very financial conditions that had caused us to hesitate, making a step down in purchases more tenable. After our announcement, long-term interest rates fell while stocks rallied. The next day, the dovish New York Times editorial page said we were right to stay the course on securities purchases. That didn’t persuade our critics, however. The headline on the Wall Street Journal editorial said, “Mr. Bernanke Blinks.” It accused me of “a large failure of nerve.” Echoing Rick Perry’s remarks of 2012, a Financial Times columnist called me a “taper traitor.” At this point in my tenure, I didn’t care

about the commentary, or about bond traders’ anger at being wrong-footed. I just wanted us to do the right thing.

AS IT TURNED OUT, I wasn’t sorry we held our fire. The Republican-majority House and the Democratic-majority Senate soon reached an impasse on the spending bills that keep the government operating. Republicans insisted on defunding the Affordable Care Act (known as Obamacare), and Democrats, not surprisingly, refused. The federal government “shut down” on October 1. (That’s not the same as, or nearly as bad as, failing to raise the debt ceiling and defaulting on government debt.) An estimated 800,000 federal employees were told to stay home. However, 1.3 million civilian employees deemed “essential” reported for work, albeit without knowing when they would be paid, and 1.4 million military personnel and 500,000 postal workers also remained on the job. The Federal Reserve, funded by earnings on our securities portfolio, remained open.

In other words, many government functions continued, though a few places with high visibility, such as the national parks, closed. (On Sunday, October 13, an angry group of aging veterans and their supporters tore down National Park Service barricades blocking their access to the World War II Memorial on the National Mall. Good for them, I thought.) I was dismayed to learn that the Labor Department’s report on September employment, due out October 4, would be delayed by the shutdown. Formulating effective monetary policy requires timely information. I telephoned Thomas Perez, secretary of labor, and asked whether he could provide the report on time if the Fed found a way to pay the cost. After checking with his lawyers, he got back to me to tell me that wasn’t possible.

Date: 2016-04-22; view: 668