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For release on delivery
11:00 a.m. EDT
October 11, 2013

Communications Challenges and Quantitative Easing

Remarks by
Jerome H. Powell
Board of Governors of the Federal Reserve System
at the
2013 Institute of International Finance Annual Membership Meeting
Washington, D.C.

October 11, 2013

It is an honor to be here today with such distinguished panelists to discuss the
communications challenges associated with quantitative easing. I should say at the outset
that the views I express here today are my own and may not reflect those of other Federal
Open Market Committee (FOMC) members.
I’ll start with the FOMC’s commitment, when the current asset purchase program
was launched in September 2012, to continue purchases until the Committee sees a
substantial improvement in the outlook for the labor market, a term the Committee left


This commitment was powerful precisely because it was open ended. But

“open ended” does not mean unending. As time passed and labor market conditions
improved, it would be important for the Committee to clarify the meaning of the term
substantial improvement. And given the lack of precedent, it was likely that this
transition to more-specific guidance would involve some short-run volatility.
Economic conditions have improved since the program was launched. Consumer
and business confidence moved higher, and sectors such as housing and autos have
performed well. Despite strong, ongoing headwinds from fiscal policy, there has been
significant progress in the labor market. From September 2012 through August of this
year, the private sector created 2.3 million new jobs. The unemployment rate declined
from 8.1 percent to 7.3 percent. It’s unclear how much of this improvement was due to
the program, but I think there is evidence that it played a role, lowering long-term interest


The Committee also noted: “In determining the size, pace, and composition of its asset purchases, the
Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.”
See Board of Governors of the Federal Reserve System (2012), “Federal Reserve Issues FOMC
Statement,” press release, September 13,

-2rates and raising equity prices and home prices, effects that have supported household
and business spending.
In March 2013, the Committee began noting in its postmeeting statement that it
would consider “the extent of progress toward its economic objectives” in judging “the

size, pace, and composition of its asset purchases.” In late May, the Chairman stated, in
response to a question during a congressional hearing, that the Committee might begin to
reduce the pace of asset purchases “over the next few meetings.” 3 A few weeks later, at
his press conference after the June 2013 FOMC meeting, the Chairman noted that the
substantial improvement test might well be met over the coming year, and he therefore
set forth a framework designed to clarify the path of purchases. 4
Under the most recent articulation of that framework, in considering when to
reduce purchases, the Committee will “assess whether incoming information continues to
support [its] expectation of ongoing improvement in labor market conditions and
inflation moving back toward its longer-run objective.” 5 The path of purchases is
entirely data dependent, as numerous FOMC participants have emphasized in public
The market reaction to the Chairman’s May testimony and the June FOMC press
conference was significant, particularly given the modest character of the news: that the
Committee might bring purchases to a gradual halt over the course of a full year, but only


See Board of Governors of the Federal Reserve System (2013), “Federal Reserve Issues FOMC
Statement,” press release, March 20,
The Chairman delivered a statement before the Joint Economic Committee, U.S. Congress, on May 22,
Information on the Chairman’s June 19. 2013, press conference is available on the Board’s website at
See Board of Governors of the Federal Reserve System (2013), “Federal Reserve Issues FOMC
Statement,” press release, September 18,

-3if the economy performs broadly in line with the Committee’s expectations--which is to
say, pretty well.
Many factors may have contributed to this market reaction. Among them, I
would argue that market expectations began to lose touch with Committee intentions in
two ways. First, while the Committee sees policy as data dependent, markets seem to fix
on dates. The decision to reduce purchases now or to hold off for a meeting or two does
not carry great macroeconomic significance. But, to a fixed-income trader, the timing of
the decision is everything. It appears that many market participants concluded after the
June press conference that the Committee was eager to reduce purchases and committed
to doing so at the September meeting, independent of incoming data.
Second, the expected path of the federal funds rate, as reflected in various market
prices, increased significantly, implying an earlier liftoff from the zero lower bound than

suggested by the Committee’s forward guidance. Many FOMC members had said
publicly that the decision to reduce purchases did not reflect any change in the
Committee’s plans for holding the federal funds rate at its current level.
The September decision not to reduce purchases clearly took some market
participants by surprise. For me, the decision was a close call, and I would have been
comfortable with a small reduction in purchases. However, as the minutes of the
September FOMC meeting reflect, there were legitimate concerns about the strength of
incoming economic data, the economic effects of tighter financial conditions and of


Decomposing federal funds futures into components representing the true expected path of the federal
funds rate and term premiums is difficult. Staff models suggest that a portion of the upward revision in the
federal funds futures curve over this period was associated with a pulling forward in the expected date of
liftoff in the federal funds rate.

-4tighter fiscal policy, and the prospect for disruptive events on the fiscal front. 7 I
supported the decision as a reasonable exercise in risk management. Events since the
September meeting suggest that the concerns regarding fiscal matters were well founded.
I would like to push back against the narrative that the decision at the September
meeting has damaged the Committee’s communications strategy. In its communications,
the Committee seeks to influence market conditions over the medium term in a way that
is consistent with its policy intentions. As I suggested earlier, as we navigate this
unprecedented transition back to more normal policy, there may be volatility in the short
run. And we will continually strive to improve our communications and avoid surprises.
But, at the end of the day, my own judgment is that market expectations are now better
aligned with Committee assessments and intentions.
The September decision underscored the Committee’s intention to determine the
pace of purchases in a data-dependent way based on progress toward our objectives.
Moreover, the modest net tightening in financial conditions since the June meeting has
likely reduced the prevalence of highly leveraged, speculative positions. I believe that
the market is now prepared for a reduction in purchases when the economic outlook and
the broader situation support it.
Short term rates have fallen back since the September meeting, and are now better
aligned with the Committee’s forward rate guidance. This is particularly important
because, as the Chairman stressed in September, the Committee views rate policy as its
stronger and more reliable tool.


See Board of Governors of the Federal Reserve System (2013), “Minutes of the Federal Open Market
Committee, September 17-18, 2013,” press release, October 9,

-5To wrap up, let me emphasize that what matters is the overall stance of policy, not
the pace of asset purchases. In all likelihood, policy will remain highly accommodative
for quite a while longer--as long as needed to support an economy that still struggles to
shake off the lingering effects of the financial crisis.
Thank you.