Phasing out the Federal Reserve’s stimulus and monetary accommodation will cause some market volatility and pain, said former U.S. Treasury Secretary Henry Paulson.
The Fed has been making $85 billion in monthly bond purchases and holding the key interest-rate target near zero to spur job growth and faster U.S. economic expansion. The central bank will probably taper its asset purchases later in 2013 and stop them around mid-2014 as long as the economy performs in line with its projections, Chairman Ben S. Bernanke said June 19.
“When you have a big, ugly problem, there’s never going to be a neat, elegant solution that is totally painless or without a cost,” Paulson said in an interview on CNBC today. “It’s just completely unrealistic to assume that those programs could be phased out without some market volatility and some pain because market participants, some of them are addicted to these abnormally low interest rates.’’
After a slump last week, U.S. stocks rallied for a third day as economic data indicated Fed policy makers can continue to provide additional stimulus to the economy.
“We need to get our economy growing faster than 2 percent. We need to deal with the deficit,” Paulson said. “The only way you’re going to do that is bipartisan compromise.”
Revised data from the Commerce Department yesterday showed the world’s largest economy grew at a 1.8 percent annualized rate in the first three months of the year as consumer spending climbed at a 2.6 percent pace. Both estimates were lower than previously calculated.
Asked about China, Paulson said that country is willing to tolerate slower growth while it fixes its financial system.
China’s stocks have plunged on concern a cash squeeze is hurting economic growth. The Shanghai Composite Index is trading at four-year lows, while the CSI 300 Index entered a bear market on June 24.
“The economy is now so big and so complex, it’s difficult to manage with this combination of administrative means and market means,” Paulson said. Chinese leadership is “committed to moving more toward markets and less toward top-down planning, but there’s a lot they need to do.”
Paulson said the credibility of Chinese economic statistics “has always been an issue.”
“We know that it’s been growing fast for a long time,” Paulson said. “But the exact numbers, that’s a problem. And the government’s aware of that. They’re doing everything they can to get more accurate numbers.”
Paulson, 67, former chief executive officer of Goldman Sachs Group Inc., served as Treasury secretary from 2006 to 2009, during the worst of the financial crisis.
Since leaving the Treasury, Paulson has served as chairman of the Paulson Institute, a Chicago-based nonpartisan center he founded in 2011 to promote sustainable economic growth and a cleaner environment, which has focused on the U.S. and China.