Goldman Sachs’s Cohn Sees Pain When Fed Ends Bond Purchases

Goldman Sachs President and COO Gary D. Cohn
Gary D. Cohn, president and chief operating officer of Goldman Sachs Group Inc. Photographer: Tomohiro Ohsumi/Bloomberg

The Federal Reserve will struggle to end its quantitative easing program, said Gary D. Cohn, Goldman Sachs Group Inc.’s president and chief operating officer.

“I understand what they’re trying to do and I will tell you this, this is going to be difficult to stop or to exit,” Cohn told Bloomberg Television today in Tokyo. “At the end of this -- there will be an end to quantitative easing -- we will have to go through the pains of stopping quantitative easing.”

The Fed last month announced its third round of large-scale asset purchases since 2008, with no limit this time on the ultimate amount it would buy or the duration of the program. Fed Chairman Ben S. Bernanke says that stimulus will be expanded until policy makers see “sustained improvement” in the labor market and that the strategy works in part by boosting the prices of assets such as equities.

“We know the Fed wants to create job growth,” Cohn said. “We know that the Fed wants to create asset appreciation.”

Bank of America Corp. Chief Executive Officer Brian T. Moynihan said in a separate interview that the U.S. central bank is “working hard” to boost demand that’s less than potential and that its exit plan “is something to worry about down the road.”

Confidence Deficit

“Right now we’ve got to make sure we continue to push confidence,” he said. “That’s a problem that we’ll face more in the future than we face today.”

Fed Vice Chairman Janet Yellen said in Tokyo yesterday that policy makers have a plan to normalize monetary policy when the time comes. After it begins to raise its benchmark interest rate from near zero, the U.S. central bank has indicated it wants to sell many of the assets on its balance sheet in a “very gradual and predictable way,” she said.

“We know that this will be a challenging feat to normalize monetary policy,” she said, noting bank balance sheets may be vulnerable to any sharp increase in rates.

Bank of Israel Governor Stanley Fischer, a former Citigroup Inc. executive, said in Tokyo that central banks know what to do when inflation accelerates. “You just reverse the operation, it’s not technically difficult,” he said. “I have enough belief in my central bank colleagues to believe that if they see inflation beginning to get underway, they will react and stop it.”

Not Alone

The Fed isn’t alone in easing monetary policy, with the European Central Bank and Bank of Japan both adding to stimulus in the past three months. The ECB cut its benchmark interest rate to a record low of 0.75 percent and pledged to buy the bonds of governments that agree to austerity conditions. The Bank of Japan last month boosted its asset-purchase fund by 10 trillion yen ($128 billion) and abandoned a minimum yield for the bonds it purchases.

“They are all kind of doing the same thing so it has less impact than if other players were on the sideline,” said Cohn.

While he praised ECB President Mario Draghi for doing a “spectacular job” and removing “a lot of risk off the table,” Cohn said the ECB can’t “deal with the real long-term problem of Europe, which is economic growth.” Draghi worked at Goldman Sachs from 2002 to 2005.

Lehman Moment

Cohn echoed his June view that Europe needs a “moment” like Lehman Brothers Holdings Inc.’s 2008 bankruptcy to solve its debt stress.

“I’m not sure what the moment will be, but I do believe there’s going to be a moment when everyone takes a deep breath and says ‘we’ve got to fix this situation,’” Cohn said.

He said there is a “small” probability the euro-area will stick together, saying it’s more likely than not that some countries will exit the 17-nation bloc to pursue growth. Greece, for example, could enjoy a “thriving, booming economy based on tourism” within five years if they devalued, he said.

With the annual meetings of the International Monetary Fund under way in Tokyo, Cohn said the world economy is in a “tough place” and lacks leadership.

Europe’s strains, a slowdown in China and the U.S.’s fiscal challenges all “point you to be cautious,” Moynihan said. The U.S. economy “continues to grow” and Europe’s problems will “ebb and flow,” he said.

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