Former chairman of the Federal Reserve Paul Volcker believes the Federal Reserve has come in for unfair criticism related to its decision to ‘taper' its asset purchases late last year (see video above).
Volcker told an audience at the Central Banking Awards dinner on March 13 that he was perplexed by criticism of the Fed when it made a very small, even "tiny", move towards ending its purchases of US Treasuries and mortgage-backed securities. The Fed started to reduce its $85 billion of monthly US bond purchases in December last year. It now buys $55 billion of such securities per month.
In a ‘conversation' with Central Banking founder Robert Pringle, Volcker said there were complaints that other central banks should have "consulted" regarding tapering. But he said it was unworkable for the Fed to consult with every nation around the world when making its policy decisions. Volcker said volatile capital flows and currencies are a product of the structure of the current monetary system, rather than any actions undertaken by the Fed on tapering.
Volcker added that one of the issues in the lead-up to the financial crisis of 2007–08 was that huge imbalances built up in China and the US but "nobody wanted to do anything" about it, he said. "There was nothing in the system that made anybody do anything [to address the imbalances]," Volcker added. Asked if that was a system the world should operate with today, Volcker replied: "I don't think so", adding that "nobody is prepared to look at it".
To take away the punchbowl in time is Mrs Yellen's big test
Asked if the bloated balance sheets of major central banks can be run down without necessarily causing renewed market turbulence or a surge in inflation, Volcker said he believed it was both technically and operationally possible.
But he said there are a number of areas for policy-makers to watch.
First, since the collapse of the US mortgage market, the Fed has become the world's biggest financial intermediary; secondly, a heavy load has been placed onto central banks. They are essentially ‘the last game in town' and "that is dangerous", said Volcker. Central bankers, including Fed chair Janet Yellen, may also need to act: "To take away the punchbowl in time is Mrs Yellen's big test," Volcker said.
As central banks have taken on increasing responsibilities, including de facto dual mandates, regulation, macro-prudential supervision and so on, Volcker said he was concerned that they may be taking on too much: "[Central banks] are promising more than they can do."
Volcker was the recipient of Central Banking's inaugural lifetime achievement award.