Effects of the 2013 ‘Taper Tantrum’ Linger Over Fed Policy

8

At the Fed’s June meeting, Mr. Powell and his allies pressed Mr. Bernanke to reinforce the message.“It will be very important to leave the markets feeling much more certain about the Committee’s intentions,” Mr. Powell said, according to the transcripts. “It’s important that the Committee, by which I really mean the Chairman, assert strong leadership to the markets on this issue at this time.”Mr. Powell acknowledged that the Fed was facing a challenge in explaining its plans. Economic growth had repeatedly fallen short of the Fed’s expectations and millions of Americans remained out of work. Mr. Bernanke would need to explain why the Fed thought the economy needed less help.But he expressed confidence in Mr. Bernanke. “Much rests on the shoulders of the Great Communicator,” he said, referring to the chairman. Then he compared Mr. Bernanke to LeBron James.Mr. Bernanke flubbed his lines at the post-meeting news conference, leaving investors confused about the Fed’s intentions. Asset prices reacted as if the Fed was significantly reducing its stimulus plans. The yield on the benchmark 10-year Treasury rose by more than a percentage point over the summer.The Fed finally announced it would begin to taper its bond purchases in December 2013.The market’s reaction convinced Fed officials, including Mr. Powell, that the Fed should handle its balance sheet differently from its benchmark interest rate. When the Fed began to reduce its bond holdings in 2017, it published a detailed timetable for those reductions, and it has stayed on schedule.The taper tantrum, Mr. Powell said in Atlanta, is “one of the reasons why the balance sheet is supposed to be in the background, gradual and predictable, paint drying, as opposed to an active tool.”But investors increasingly are divided on the wisdom of that approach. Some see little evidence the Fed’s plodding approach is disrupting financial markets. Others say the Fed, despite moving slowly and predictably, is still making waves.