The Federal Reserve’s exit from quantitative easing will increase market volatility, said former U.S. Treasury Secretary Henry Paulson, who also praised Fed Chairman Ben S. Bernanke for navigating the economic recovery from the 2008 financial crisis.
The Federal Open Market Committee is scheduled to meet Sept. 17-18 to consider the future of the third round of quantitative easing known as QE3. Economists expect the Fed to reduce monthly asset purchases to $75 billion from $85 billion, according to a Sept. 6 Bloomberg News survey.
“There is bound to be volatility,” Paulson said in an interview with Tom Keene on Bloomberg Television today. “When you have a big, ugly, messy problem, there is never going to be a perfect, elegant solution.”
The Fed has pledged for more than a year to press on with asset purchases until achieving sustainable gains in the labor market. The central bank announced a third round of quantitative easing in September 2012 to reduce longer-term interest rates, stoke economic growth and combat unemployment.
The yield on the benchmark 10-year Treasury note has climbed almost one percentage point since Bernanke said May 22 that the central bank could “take a step down in our pace of purchases” in the “next few meetings.” The yield closed at 1.93 percent on May 21, the day before Bernanke spoke. It closed at 2.91 percent at 4:59 p.m. in New York today, according to Bloomberg Bond Trader prices.
Bernanke said June 19 policy makers may reduce the pace of purchases this year and halt them by mid-2014.
Paulson praised Bernanke for bringing the U.S. economy back to growth while reducing the level of household debt and stabilizing the financial system.
“I believe that Ben Bernanke has been a hero,” Paulson said. “To be where we are today, where you’ve had growth of, you know, 2 percent since late 2009 while we’ve been undergoing this necessary and massive deleveraging of consumers -- that’s important.”
Paulson, President George W. Bush’s Treasury secretary and former Goldman Sachs Group Inc. chief executive officer, is now chairman of the Paulson Institute, a Chicago-based non-partisan center he founded in 2011 to promote sustainable growth and a cleaner environment, focused on the U.S. and China.