Fed's Powell: Would Have Been Comfortable with Small Sept. Taper

WASHINGTON — Federal Reserve Governor Jerome Powell said Friday he would have been "comfortable" with a small taper at the September meeting, but that events since then show the Fed's policymaking committee's concern over fiscal issues were "well founded."

"For me, the decision was a close call and I would have been comfortable with a small reduction in purchases," Powell said in remarks prepared for delivery at an Institute of International Finance event.

"However, as the minutes of the September FOMC meeting reflect," he said, "there were legitimate concerns about the strength of incoming economic data, the economic effects of tighter financial conditions and of tighter fiscal policy, and the prospect for disruptive events on the fiscal front."

He added that "I supported the decision as a reasonable exercise in risk management. Events since the September meeting suggest that the concerns regarding fiscal matters were well founded."

Powell argued that the reaction to the Fed's decision to continue buying $85 billion in Treasuries and agency mortgage backed securities each month showed a disconnect between the markets and the Federal Open Market Committee's intentions in two ways.

"First, while the committee sees policy as data dependent, markets seem to fix on dates," Powell said. "The decision to reduce purchases now or to hold off for a meeting or two does not carry great macroeconomic significance." He added that markets concluded the committee was "eager" to reduce purchases following the June meeting and "to a fixed-income trader, the timing of the decision is everything."

Second, Powell said, was that the expected path of the federal funds rate "increased significantly, implying an earlier liftoff from the zero lower bound than suggested by the committee's forward guidance," despite assurance from several members that the tapering decision and rate decision were separate.

The decision to continue asset purchases at its current level, even though it surprised the market, doesn't undermine the Fed's communication efforts. "I would like to push back against the narrative that the decision at the September meeting has damaged the Committee's communications strategy," Powell said.

"As we navigate this unprecedented transition back to more normal policy, there may be volatility in the short run. And we will continually strive to improve our communications and avoid surprises," he said "But, at the end of the day, my own judgment is that market expectations are now better aligned with Committee assessments and intentions."

Powell added, "In all likelihood, policy will remain highly accommodative for quite a while longer," he said, "as long as needed to support an economy that still struggles to shake off the lingering effects of the financial crisis."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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