Tags: Fed | Stein | QE | Tapering

Fed's Stein: QE Tapering Set for Smooth Landing

Tuesday, 06 May 2014 07:25 PM

Jeremy Stein, in one of his last speeches as a Federal Reserve governor, said policy makers are set for a smooth end to their bond-buying program that won’t whipsaw investors with shifting interest-rate expectations.

Investors “almost uniformly expect” that the Federal Open Market Committee will continue tapering purchases in “further measured steps” through the rest of the year, Stein said Tuesday in remarks prepared for delivery in New York. The Fed has slowed buying in $10 billion increments over the past four meetings to $45 billion a month.

“We are currently in a very good position with respect to the market’s expectations for our asset purchases,” Stein said. “With these expectations in place, the execution of the taper itself becomes much easier, as we no longer have to worry about a step-down at each meeting sending a potentially misleading message about our intentions with respect to the future path of the federal funds rate.”

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Fed Chair Janet Yellen and her colleagues are starting the process of dialing back the most aggressive policy actions in the central bank’s history, aiming to do so without destabilizing financial markets. They have kept the main rate near zero since December 2008 and more than quadrupled the balance sheet to almost $4.3 trillion.

Stein said he agrees with Yellen’s comment at her March press conference that the FOMC’s views on policy will evolve as the economy does, and that uncertainty shouldn’t be eliminated.

“As policy normalizes, forward guidance will be less commitment-like and, hence, a less precise guide to our future actions than it has been in the recent past,” Stein said.

Still, some investors may be “underestimating the degree of uncertainty about the future path of policy and are placing levered bets accordingly,” he said. “So we may have some further bumps in the road as this all plays out.”

Stein also cautioned that while making small and predictable steps helps the Fed meet its policy mandates by not roiling markets, investor expectations it will do so may ultimately undermine the central bank’s monetary policy.

“Efforts to overly manage the market volatility associated with our communications may ultimately be self-defeating,” Stein said to the Money Marketeers of New York University.

“There is always a temptation for the central bank to speak in a whisper, because anything that gets said reverberates so loudly in markets,” he said. “But the softer it talks, the more the market leans in to hear better and, thus, the more the whisper gets amplified.”

Stein’s exit leaves the Board with just three of seven governor positions filled: Yellen, Daniel Tarullo, and Jerome Powell. Powell is awaiting confirmation for a second term by the Senate.

Two other nominees to the board are also awaiting confirmation: Lael Brainard, a former U.S. Treasury undersecretary for international affairs, and former Bank of Israel Governor Stanley Fischer, who would serve as vice chairman. Senate Majority Leader Harry Reid said last week that it was possible to have a vote on the trio by June.

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Jeremy Stein, in one of his last speeches as a Federal Reserve governor, said policy makers are set for a smooth end to their bond-buying program that won't whipsaw investors with shifting interest-rate expectations.
Fed, Stein, QE, Tapering
Tuesday, 06 May 2014 07:25 PM
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