Fed Chairs statement from March 2013 before ascending to the job 6 years later
With inflation under control, I have the same two main concerns as others. The first is that our policies will push the markets too hard, and that the result will be an unexpectedly sharp increase in rates as normalization approaches and damage to the real economy. I see that risk as manageable for now but increasing materially with the size of the balance sheet.
I also see it as principally a risk of market dynamics and not one that is easily captured by our model. The second major cost, again, is that of the realization of losses, low remittances, and depleted capital. And I want to say that I think this scenario captures my concern. It’s in one of the many memos.
We buy another $500 billion, which gets us to $1 trillion starting on January 1, 2014. Rates are 100 basis points higher. The first part of that is a near certainty at this point, it seems to me, at least in the market’s expectation. The second is quite plausible. That gives us five years of zero remittances, $300 billion in losses, and we sprout a deferred asset of $63 billion in 2019. I’m very uncomfortable with that for the political risk reasons that have been elaborated.
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I have one final point, which is to ask, what is the plan if the economy does not cooperate? We are at $4 trillion in expectation now. That is where the balance sheet stops in expectation now. If we have two bad employment reports, the markets are going to move that number way out. We’re headed for $5 trillion, as others have mentioned. And the idea that President Kocherlakota said and Governor Duke echoed— that we ’re now a captive of the market — is somewhat chilling to me. I think we need to regain control of this, or we will be moving out on that if the economy doesn’t cooperate. There’s some material part of the probability distribution that is not covered by a plan, in my view. The way to get at it is to increase flexibility, starting now, around the plan for the existing prongs: the costs and the risks, and what constitutes a substantial improvement. I think both of those need to be communicated better to the public in a way that increases our flexibility to do something, because if the economy doesn’t cooperate, I don’t know what we do. The problem has been, and is, the open-endedness of the plan. And I would say , in closing, that the risks may be manageable at $4 trillion, but at $5 trillion , you’re in a different league. There has to be convexity in this.
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