The Duke-Powell-Stein “Taper Caper”

In a recent post, I described the culture of consensus that is the basis for Federal Open Market Committee decision-making. I pointed out that there has not been a No vote by a governor in ten years, and that there has not been more than one No vote by a governor in more than twenty years. I suggested that expectation of governor unanimity opened up the theoretical possibility that a minority bloc of governors could have substantial influence on monetary policy.

In this post, I give a concrete example of this theoretical possibility. In it, I discuss the circumstances surrounding the FOMC”s communication in mid-2013 of its intention to reduce (“taper”) its monthly flow of asset purchases. The post draws extensively on Chapter 23 of ex-Chairman Ben Bernanke’s recent memoir, “The Courage to Act,” which is entitled “Taper Capers”.

Ben writes that in early 2013, “I was … wondering how much longer the FOMC would support the ultra-accommodative monetary policy needed to offset the fiscal (and other) headwinds … I was particularly concerned that I could lose the support of three Board members: Jeremy Stein, Jay Powell, and Betsy Duke … Because they all had permanent votes on the FOMC, I couldn’t afford to lose the support of the three Board members.” [Caution: ellipses do omit large blocks of text, but don’t change the overall meaning of what Ben writes.]

He goes on to write: “I told them that while my view on securities purchases differed from theirs, I would do my best to accommodate their preferences. ‘My position as Chairman is untenable if I don’t have the support of the Board.’ I told them.” (italics mine)

Chairman Bernanke acceded to this internal pressure by communicating to the public in May 2013 (and after the June 2013 FOMC meeting) that the Committee intended to taper in the near term. As it turned out, this communication marked the beginning of the FOMC’s ongoing gradual tightening cycle.

One aspect of the FOMC’s consensus model that I didn’t mention in my previous post is that it detracts from transparency. The above internal discussions were mostly hidden from the public. As Ben writes, “Jay expressed his concerns mostly within the Fed, as did Betsy.” (Jeremy Stein did talk publicly about his perspectives.) In my view, this lack of openness contributed to the magnitude of the 2013 “taper tantrum”.

The decision to taper was probably one of the most important made by the Committee in the six years that I served as Minneapolis Fed president. It is a great illustration of how the FOMC’s consensus framework means that small blocs of Fed governors can steer the course of US monetary policy.

N. Kocherlakota

Rochester, NY, February 6, 2016

Please address media enquiries and non-academic speaking requests to Monique Patenaude ([email protected] and 585-276-3693).