Powell Backed Fed's Bond-Buying Plan With Reservations in 2012 -- Update

Federal Reserve governor Jerome Powell supported an aggressive expansion of the Fed's controversial bond-buying program in 2012 but expressed reservations behind closed doors over longer-run risks, according to transcripts of central bank policy meetings released by the central bank on Friday.

Mr. Powell joined the board in May of that year and has been tapped by President Donald Trump to succeed Fed Chairwoman Janet Yellen next month. Because he voted consistently to support the policies of former Fed Chairman Ben Bernanke and later Ms. Yellen, markets expect he wouldn't deviate significantly from the Fed's current policy path to gradually raise rates.

Still, the release of the transcripts Friday reveal for the first time his greater caution in 2012 about aggressively deploying unconventional policy tools compared with Mr. Bernanke and Ms. Yellen, who forcefully warned in the 2012 meetings about the risks to job markets if they failed to provide additional economic stimulus.

The transcripts of eight meetings of the Fed's rate-setting committee, which include the first five meetings attended by Mr. Powell, provide a window to officials' behind-the-scenes policy debates in a year when they unleased a third round of bond purchases aimed at boosting the then-fitful U.S. economic recovery.

The release of 2,167 pages of transcripts and other materials, published with the customary five-year lag, provide the first verbatim public record of what individual Fed officials and staffers said during policy discussions. Until now, their comments have only been summarized in the minutes released three weeks after each meeting, without identifying any speakers by name.

While Mr. Powell evinced greater skepticism about the benefits of resuming bond purchases, the transcripts also show he strongly backed efforts to target those purchases towards boosting a nascent housing rebound by purchasing mortgage-backed securities.

Many conservative economists have objected most strongly to the Fed's bond-buying programs because they said targeting one particular sector of the economy -- in this case, housing -- amounted to credit policy better left to fiscal policy makers in Congress and the White House.

In August 2012, as more Fed officials including Ms. Yellen pushed for renewed stimulus to boost flagging growth, Mr. Powell said the bar for another round of bond-buying "is high and not yet met." He said he wasn't sure more stimulus would increase hiring. He also listed a string of potential risks, including inflation and the difficulty of exiting from the bond-buying program.

While Mr. Powell said he was "coming around to the view" that those risks "are manageable," he raised concerns that asset purchases could one day lead to accounting losses the Fed would report on those vast holdings, which could create political headaches for the central bank.

"In excess of 95% of economists agree that the metric is irrelevant, and I've no doubt that it is," he said. Still, "it could matter a great deal for this institution if it comes to pass."

At the September 2012 meeting, Mr. Powell said he believed the proposal to start open-ended purchases of mortgage securities would boost sluggish economic growth on balance and that the costs appeared manageable in the short run.

Nevertheless, he said, he backed the proposal "with a certain lack of enthusiasm," and he added, "I am somewhat uncomfortable with the road that we are on." The decision to purchase assets differed from the crisis-fighting stance of 2008 and 2009, he said, in that the Fed was now resorting to such 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," he said. Mr. Powell underscored his concerns were about the mid-to-long term, and not the next six months.

"My concern is that for very modest benefits, we are piling up risks for the future and that it could become habit forming," he said during a Sept. 13, 2012 Fed meeting.

The Fed announced after the meeting it would launch its third and most aggressive program to spur the economy by purchasing mortgage bonds to drive down long-term interest rates and push investors into other assets, like stocks.

At the Fed's meeting the following December, officials voted to increase its open-ended purchases to $85 billion per month, with $40 billion in mortgage bonds and $45 billion in Treasurys.

The Fed in 2008 launched the first of three rounds of bond purchases aimed at stabilizing markets and lowering long-term interest rates. The move was untested and drew criticism from some economists and lawmakers that the central bank was risking a surge in inflation.

In the end, the economy and the labor market continued to strengthen while inflation remained under control. Despite some early misgivings, Mr. Powell by 2014 had come to embrace the view that the central bank should be prepared to take aggressive and sustained action to fight a recession.

"Let's let the data speak: The evidence so far is clear that the benefits of these policies have been substantial and that the risks have not materialized," he said in a speech in February 2015.

The Fed should be prepared to employ bond purchases again to support the economy if it is in dire shape and doesn't respond to interest-rate cuts, Mr. Powell said last year.

Some concerns Mr. Powell flagged during his first year at the Fed about the potential for market instability and difficulty communicating the Fed's plans to exit the purchase programs materialized in May 2013. When the Fed discussed plans to pare its bond purchases that spring, a tumble in bond prices sent yields soaring, in what was called the taper tantrum.

The Fed stopped adding to its balance sheet in 2014 but continued until last October to reinvest the principal of maturing bonds to keep its holdings steady, at around $4.5 trillion. Ms. Yellen successfully launched the Fed's strategy to slowly shrink the portfolio last fall without causing a re-run of the taper tantrum. The Fed doesn't plan to sell any holdings outright.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

January 05, 2018 16:31 ET (21:31 GMT)