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In late October 2012, the Federal Reserve met under Ben Bernanke and decided to continue quantitative easing at a pace of $85 billion per month and leave rates at 0-0.25%.
One voice who spoke out against it was then-governor Jerome Powell who warned that the Fed’s balance sheet — at $2.4 trillion — was growing too large. He said he was ‘uncomfortable’ with dealer surveys that foreast the balance sheet eventually rising to $4 trillion, which it did by the end of 2013.
It’s now nearly $9 trillion.
Here is his extraordinary commentary, from the transcript.
“First, the question, why stop at $4 trillion? The market in most cases will cheer us for
doing more. It will never be enough for the market. Our models will always tell us that we are
helping the economy, and I will probably always feel that those benefits are overestimated. And
we will be able to tell ourselves that market function is not impaired and that inflation expectations are under control. What is to stop us, other than much faster economic growth,
which it is probably not in our power to produce?
Second, I think we are actually at a point of encouraging risk-taking, and that should give
us pause. Investors really do understand now that we will be there to prevent serious losses. It is
not that it is easy for them to make money but that they have every incentive to take more risk,
and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble
right across the credit spectrum that will result in big losses when rates come up down the road.
You can almost say that that is our strategy.
My third concern—and others have touched on it as well—is the problems of exiting
from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have
done some work since then, but it just seems to me that we seem to be way too confident that
exit can be managed smoothly. Markets can be much more dynamic than we appear to think.”
Skip ahead 10 years and now Powell is sending out emergency messages to the Wall Street Journal to keep bond yields under control and we’re still nowhere near an exit strategy.
This is still the beginning. Bonds are the biggest bubble in history and this highlights how the bubble was more than 10 years in the making. Powell knew it was a bubble and either forgot or he doesn’t care.
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