Federal Reserve announces pull back on stimulus as Bernanke nears end of tenure

December 18, 2013 at 12:00 AM EDT
The Federal Reserve announced it will begin to reduce its purchase of bonds and mortgage-backed securities in January. Judy Woodruff gets reaction to the Fed's decision from David Wessel of The Wall Street Journal, John Taylor of Stanford University and Adam Posen of the Peterson Institute for International Economics.
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JUDY WOODRUFF: The Federal Reserve has been warning for months that it would shift and reduce the size of its role in spurring the economy. But right up to this afternoon’s announcement, many were still wondering when the Fed would dial back and how it would do so.

Ben Bernanke came to his last scheduled news conference as Fed chairman as the Central Bank announced it will start scaling back its long-running stimulus program.

BEN BERNANKE, Federal Reserve Chairman: Today’s policy action reflects the committee’s assessment that the economy continues to make progress, but that it also has much farther to travel until conditions can be judged normal.

JUDY WOODRUFF: The Fed has been buying $85 billion in Treasury bonds every month to hold down interest rates and boost economic growth. Starting next month, that amount will be reduced by $10 billion a month.

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At the same time, a benchmark short-term interest rate will stay near zero. The Fed says that policy will hold well past the point when the unemployment rate falls below 6.5 percent. It’s now at 7 percent.

BEN BERNANKE: The job market has continued to improve, with the unemployment rate having declined further. At the same time, the recovery clearly rings far from complete, with unemployment still elevated and with both underemployment and long-term unemployment still major concerns.

JUDY WOODRUFF: For Bernanke, the announcement is a climax to an eight-year tenure that’s been marked by big moments in U.S. financial history.

He took over as Fed chair from Alan Greenspan in 2006. Two years later, the housing bubble burst and foreclosures exploded. Mortgage-backed securities collapsed, taking down some big banks and sending shockwaves through the stock market.

Bernanke’s Fed responded with massive bond-buying, starting in 2008, known as quantitative easing. Now the challenge is to wean the economy from that support. But, Bernanke cautioned today, it all depends on how the economy does.

BEN BERNANKE: If we are making progress in terms of inflation and continue job gains, then I imagine we will continue to do probably at each meeting a measured reduction. If the economy slows for some reason or we are disappointed in the outcomes, we could — we could skip a meeting or two. On the other side, if things really pick up, then, of course, we could go a bit faster.

JUDY WOODRUFF: Bernanke’s term ends on January 31. The Senate could confirm his successor, Janet Yellen, later this week.

We examine today’s moves and the larger impact of the Fed’s stimulus program with three people who watch this all closely.

Adam Posen worked on the Monetary Policy Committee from 2009 through 2012 for the Central Bank of England. He is now the president of the Peterson Institute for International Economics. John Taylor is a former undersecretary of the treasury during the George W. Bush administration. He is a professor of economics at Stanford University. And David Wessel is an economics editor at The Wall Street Journal and the author of “In Fed We Trust.”

Welcome to you, all three.

David Wessel, to you first.

What would you add to the explanation of what the Fed did today exactly?

DAVID WESSEL, The Wall Street Journal: Well, I think the Fed is beginning the end of what has been an extraordinary period of monetary policy.

When Ben Bernanke became chairman, they had a portfolio of $800 billion. Today, it’s $4 trillion. That is just unprecedented. But Mr. Bernanke made clear that they are going to keep interest rates very low for a long time. And that seems to be what the market is focused on, because the stock market was just jumping for joy at this announcement, not fearing that the dreaded tapering.

JUDY WOODRUFF: And, David, why did they do it now?

DAVID WESSEL: Well, Mr. Bernanke said that they did it now because the economy had reached the point where they thought it was time to start turning the dial. The labor market had improved substantially.

He insisted it had nothing to do with the fact that he’s leaving office in January. But it’s very hard for me to believe that that wasn’t at least a factor in their minds: It would be good to get this going before he handed the gavel to Janet Yellen, his likely successor.

JUDY WOODRUFF: Adam Posen, was this the right move?

ADAM POSEN, Peter G. Peterson Institute for International Economics: It’s a mild mistake.

The cart is before the horse in what David just said. It wasn’t an extraordinary period in monetary policy. It was an extraordinary period in the economy. And the monetary policy tried to react to that. We’re coming to the end of that extraordinary period, so we’re shifting a bit. Probably, the Fed is tapering a bit too soon, because there’s no inflation in sight and the unemployment is still high. But it’s not a huge deal one way or the other.

JUDY WOODRUFF: You think they should have kept their foot on the pedal?

ADAM POSEN: I think they should have. I think there was very little risk and it would have been possible for them to dial it back later.

But, as you and David acknowledged, there wasn’t the kind of ripples through the markets we saw in May, when the Fed first talked about tapering. And I think it’s not just they’re used to it, but the news has been genuinely been good about the U.S. economy.

JUDY WOODRUFF: John Taylor, how do you read this? Was this the right move, in your mind?

JOHN TAYLOR, Hoover Institution: Yes, I think it is.

I think the quantitative easing has not been very effective. It’s been — interest rates are higher now than they were when quantitative easing three began. The purpose was to lower interest rates. So I think it’s a good move to begin to get off of this. And hopefully the economy will actually be working a little better now. I don’t think it’s helped the economy.

Your comment about the Fed’s actions during the panic in September-October 2008, are well taken, but after that, I think the interventions they have had have not really helped the economy, unfortunately. And it’s been a low recovery by any measure. And unemployment has only come down gradually and would be even much slower if so many people had not dropped out of the labor force.

JUDY WOODRUFF: Adam Posen, how do you respond to those comments?

ADAM POSEN: I think — I think John is missing the point.

We have seen in other countries like Greece, like Spain, where they didn’t ease monetary policy subject to the same shock, and things got much worse. When we say that the quantitative easing — I believe quantitative easing made a huge difference. We had fiscal tightening at the state and local government level, and then at the federal level outside of 2009. We had European crisis. We had household saving extra amounts.

And so we only recovered in large part because the Fed did this. We got ourselves back towards normal because of Q.E., not despite it.

JUDY WOODRUFF: John Taylor?

JOHN TAYLOR: No, I think — if you think about the purpose of the quantitative easing as stated was to lower long-term interest rates, and if — again, look at QE3. It began just in December of last year, September of last year.

And rates are higher now than they were then. So how you can say it helped? Low interest rates have not been the result. I would say, again, to distinguish between these actions taken in September-October 2008 and everything else since then. Those actions are were classic central banking. They were good. Ben Bernanke did a good job at that point.

But, since then, I just think there’s not evidence. And I think the market is going to do better basically when the Fed gets off of these extraordinary, unprecedented policies. David’s right. There’s nothing been like this — nothing like this been done before in Federal Reserve history.

And when these kinds of actions have not been taken, when they have been avoided, we have had much better recoveries. This is the worst recovery we have had…

(CROSSTALK)

JUDY WOODRUFF: Adam Posen.

ADAM POSEN: This is really disingenuous of John, because the idea that the economy is going to get better proves the Q.E. stopped working is backwards.

The reason they are easing up on Q.E. is because the economy is improving. So, playing that game doesn’t make any sense. More importantly, more importantly…

JOHN TAYLOR: There’s nothing disingenuous whatsoever with what I said.

(CROSSTALK)

ADAM POSEN: … it’s not reasonable to focus on the tools, rather than the goals. What matters is the state of the economy, not what tools they use.

JUDY WOODRUFF: John Taylor, you want to come back?

And then I want to go to David Wessel.

JOHN TAYLOR: Yes.

There is absolutely nothing disingenuous. You can just look at the data. You look at American history. You can see what works and what doesn’t. This policy has not worked. I actually think that’s why a lot of people want to get off of it. It’s not so much that the economy looks better. It’s this is an opportunity to get back to a more normal policy, like we had in the ’80s and ’90s, which worked very well.

A lot of people had been skeptical about the Q.E. It’s not just me. It’s what we see when we look at the data.

(CROSSTALK)

ADAM POSEN: Except all the bond markets keep buying U.S. bonds, and the economy is now responding. And look at all the housing market and labor data that Ben Bernanke cited. You’re just ignoring the Fed.

(CROSSTALK)

JUDY WOODRUFF: Well, let me turn to David.

David, give this debate that is still raging out there about what the Fed did, any more light you can shed on how they came to this decision?

DAVID WESSEL: Well, I think that there was some doubt at the Fed among some people about whether it was really doing any good.

I think, in response to John Taylor, they would say, the question isn’t, are rates lower now than they were when they began QE3? The question is, what would rates have been had the Fed not had done this?

But there are people on the Fed who thought this policy had outlived its usefulness, and it was causing more concern inside the Fed, which is why they decided to pull back, but, at the same time, to emphasize — and I think it’s really important — that the short-term interest rates, their traditional tool, will remain low for a very long time, probably into 2015, if not 2016.

And that’s a pretty big deal. And it may give the economy some support as they — as it begins to get to a more normal situation.

JUDY WOODRUFF: Well, as we — we know that Ben Bernanke is going to be around a little more than another month. So it’s not the end of his term, but this — we’re nearing the end. And this is a moment when we can look, I think just briefly, Adam Posen, at his record.

What has he accomplished or not? Has he accomplished what he set out to accomplish?

ADAM POSEN: I think Chairman Bernanke did an incredible job.

There were a couple errors, I think the mishandling of the taper announcement last May, certainly his role in the excessive deregulation, loose supervision of the early 2000s, but everything else was great. They reacted to the panic in 2008-2009. They got international agreement on loosening policy. He increased the transparency of the Fed.

He creatively came up with new methods when they couldn’t cut interest rates below zero. And he has responsibly talked to the American people. I think he has done great.

JUDY WOODRUFF: John Taylor, how would you size up Ben Bernanke at this point?

JOHN TAYLOR: Well, I think the actions taken during the panic in September-October 2008 were good, classic central banking, lender of last resort, providing liquidity. But if you look before and after that, I think you have to ask questions.

After Ben Bernanke joined the Federal Reserve Board, they held interest rates quite low for a long time. I think that added to the housing boom, to the search for yield and the risk-taking. And then when the bust came as a result of this boom, the action was quite slow. They thought it was liquidity. They pumped liquidity in and didn’t address the problem.

The bailouts began with Bear Stearns, but then there was uncertainty about Lehman, caused a lot of problems in the markets. Then you go beyond the panic itself into 2009-’10 and to the present, and I think these very unprecedented policies were not what the economy needed. The Fed’s growth rates were — forecast were much higher than what actually happened with the policies.

You can — we can debate this for a long time, but I think the record in terms of unemployment, business cycle stability is not so good during this particular term.

JUDY WOODRUFF: David Wessel, I’m going to let you wrap this up, describing how you think Bernanke has changed the Fed.

DAVID WESSEL: Right.

Well, I think he’s changed the Fed fundamentally. We were used to having very autocratic Fed chairmen, Paul Volcker, Alan Greenspan. He brought much openness and democracy to the Fed. It’s going to be a problem for his successor, Janet Yellen.

And even after we get done with this bond buying, interest rates return to zero — return to normal from zero, I think the Fed will be a more open place. Twenty years ago, the Fed didn’t even announce when it made an interest rate decision. Today, the Federal Reserve chairman spent 67 minutes explaining what they did on live TV. That’s a change that will not ever be put back into the bottle.

JUDY WOODRUFF: We are going to leave it there. We have got a little more time to look at his tenure. We appreciate all three of you being with us, David Wessel, John Taylor, Adam Posen.