Powell Was a Wary Supporter of QE3 in 2012

Updated on
  • U.S. growth slumped that year with jobless rate above 8 pct
  • Powell joined Fed in May 2012; Fed launched QE3 in September

Jerome Powell

Photographer: Andrew Harrer/Bloomberg

Jerome Powell, the next chairman of the Federal Reserve, was a reluctant supporter of a third round of emergency bond purchases in 2012 as the U.S. economy struggled to recover from the global financial crisis.

Transcripts of the Fed’s closed-door policy meetings from 2012 show him arguing in September that fresh asset purchases could “have positive effects on the economy but that these effects are likely to be quite modest.” The Fed released the verbatim records for their policy debates on Friday with the customary five-year lag.

The Fed that month launched a new $40 billion per month purchase program of mortgage-backed securities, or quantitative easing. The move became know as QE3 and was the most controversial of the central bank’s bond-buying rounds because it was not limited by a specific amount.

Powell, picked by President Donald Trump to replace Janet Yellen when her term as chair ends early next month, described himself in September 2012 as “somewhat uncomfortable with the road that we are on” as he voted for the measure, which was preceded by rising tensions with Republican leaders over Fed actions.

‘No Credible Threat’

“This is not 2008, 2009, or 2010,” said Powell, who joined the Fed in May 2012. “We’re now using” large-scale asset purchases “as a straightforward jobs program. There is no credible threat of deflation, recession, or financial crisis, any of which could present a compelling case for action and the use of all of our tools.”

At the time, quantitative easing was still a novel policy and central bankers had limited experience with it, said Seth Carpenter, the chief U.S. economist at UBS Securities in New York who led a briefing on the topic in September 2012 as a senior board staff official.

“There was still a lot of uncertainty about how effective they were and if, in fact, there were costs,” he added. “We have five additional years and I think everybody has revised their estimate of what the cost and benefit is.”

The 2012 transcripts describe an eventful period for monetary policy. Battered by the European debt crisis and troubled by a slow recovery in employment, then-Chairman Ben Bernanke launched a third round of massive bond purchases in September and augmented it in December with additional purchases and aggressive forward guidance on the policy rate.

The economy slumped to a 1.3 percent annualized pace of growth in the fourth quarter of 2012 versus the same period in 2011, while unemployment averaged 8.1 percent for the year. Inflation started 2012 at 2.6 percent but then decelerated to 1.7 percent by the end of the year and slowed even more in 2013. In January 2012, the Fed officially adopted a 2 percent inflation target. It would miss this goal for most of the next five years.

Numerous Concerns

September’s launch of QE3 was boosted in December with new Treasury purchases bringing the total to $85 billion a month. Unlike the two previous rounds of so-called quantitative easing, this one was open-ended. The policy committee also pegged a change in the federal funds rate, which was in a range of zero to 0.25 percent, to so-called “thresholds,” or numeric goals for inflation and unemployment.

Powell voiced numerous concerns about the additional Treasury purchases in December 2012, even though he saw the economy stuck in a slow-growth pattern the following year. He worried that a prolonged period of sluggish economic expansion would result in constant asset purchases that would raise the Fed’s balance sheet significantly.

“My industrial contacts report nothing but weakness and significant layoffs in the coming months,” he said. “How is this not a $1 trillion to $2 trillion LSAP? Where is the substantial improvement in the outlook for the labor market?”

LSAP stands for large-scale asset purchases. While Powell favored MBS purchases at the December meeting, he was skeptical that additional Treasury purchases would have much of an impact on the economy.

“Lower Treasury rates will have little incremental effect, I would predict, on private business rates, which are already historically low and set to decline,” he told the committee in December. “Private-business borrowers have not responded to still lower rates by hiring or investing -- and they’ve made it clear that they don’t intend to change that until demand changes.”

Reservations Clear

Powell voted in favor of additional action at the meeting, though he made his reservations clear.

“I’m concerned that the actions contemplated in this meeting are setting us on a path to a much larger balance sheet with likely benefits that are not commensurate to the risks that we’re bearing,” he said.

The transcripts also show that Powell, who is not a Ph.D. economist, is well-versed in the technical aspects of the Fed’s policy debates, and resorted to his industry and market contacts to gain perspective. In October, for example, he warns the Federal Open Market Committee that quantitative easing is causing a reach for yield.

Investors “say that deals are being done in the high-yield market on terms that are very similar to the bubble terms of 2005 to 2007,” Powell said. “You’ve got the return of dividend deals, and in a dividend deal, ownership doesn’t change hands, but fixed-income investors fund a large onetime dividend to private-equity investors, and it typically involves structural subordination, peak leverage levels, payment-in-kind bonds, and no covenants. So this is a very peaky, bubbly structure, and we’re seeing more and more of those.”

Powell also showed sensitivity to public perceptions toward the U.S. central bank. Part of his backing for MBS purchases in September, he said, was because it could be understood and welcomed as support for housing and the broader economy.

“It stands a decent chance to actually be noticed and appreciated by people who are neither Fed watchers nor professional market participants nor economics bloggers,” he said.

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