Tags: Powell | Fed | economy | risk

Powell Says Pressing on With QE Is 'Reasonable' Risk Management

Friday, 11 Oct 2013 11:29 AM

Federal Reserve Governor Jerome Powell said he backed the Fed’s decision last month to press on with $85 billion in monthly bond purchases to buffer against the risks of fiscal gridlock in Washington and an economic slowdown.

“I supported the decision as a reasonable exercise in risk management,” Powell said in a speech in Washington, as the government shutdown stretched into its 11th day. “Events since the September meeting suggest that the concerns regarding fiscal matters were well founded.”

The Federal Open Market Committee chose to continue asset purchases at its Sept. 17-18 meeting, saying it wants to see more evidence the economy will strengthen enough to bring down 7.3 percent unemployment. The move surprised many economists who expected the Fed to begin tapering purchases at that gathering.

“For me, the decision was a close call, and I would have been comfortable with a small reduction in purchases,” Powell said in remarks prepared for a speech to the Institute of International Finance annual membership meeting.

“There were legitimate concerns about the strength of incoming economic data, the economic effects of tighter financial conditions and of tighter fiscal policy, and the prospect for disruptive events on the fiscal front,” he said.

Economists had forecast the FOMC would dial down monthly Treasury purchases by $5 billion, to $40 billion, while maintaining its buying of mortgage-backed securities at $40 billion, according to a Bloomberg survey.

Yield Fell

The yield on the 10-year Treasury dropped by 0.16 percentage point on the day of the announcement and the Standard & Poor’s 500 Index climbed 1.2 percent on the prospect of Fed stimulus lasting longer than expected.

“The September decision not to reduce purchases clearly took some market participants by surprise,” Powell said. “The decision to reduce purchases now or to hold off for a meeting or two does not carry great macroeconomic significance. But, to a fixed-income trader, the timing of the decision is everything.”

Yields on Treasurys have remained lower following the Fed’s meeting. The 2-year Treasury was at 0.34 percent at 10:25 a.m. today, down from as high as 0.53 percent in September.

“I would like to push back against the narrative that the decision at the September meeting has damaged the Committee’s communications strategy,” Powell said. “Short-term rates have fallen back since the September meeting, and are now better aligned with the Committee’s forward rate guidance. This is particularly important because, as the Chairman stressed in September, the Committee views rate policy as its stronger and more reliable tool.”

Powell, 60, a Treasury official under President George H. W. Bush and a former private equity investor, became a Fed governor in May 2012. He has never dissented from a decision of the Federal Open Market Committee.

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Federal Reserve Governor Jerome Powell said he backed the Fed's decision last month to press on with $85 billion in monthly bond purchases to buffer against the risks of fiscal gridlock in Washington and an economic slowdown.
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2013-29-11
Friday, 11 Oct 2013 11:29 AM
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