During the final Federal Open Market Committee meeting of 2012, Janet Yellen voiced some prescient concern about what would become the biggest monetary policy story of the following year.
At the Dec. 11-12, 2012, meeting, the Fed’s then-vice chair worried that “longer-term yields could jump as soon as the FOMC signals the conclusion or a reduction of our asset purchases, or the onset of active tightening, resulting in substantial losses for some fixed-income investors,” according to a transcript published Friday.
In May 2013, then-Fed Chairman Ben Bernanke set off what turned into a 1.1 percentage-points surge in Treasury yields when he hinted publicly at the possibility the U.S. central bank would start thinking about tapering the monthly rate of bond purchases it was making under the quantitative easing program it had launched in September 2012.
“Such concerns seem justifiable, given that we have previously seen sharp movements in longer-term yields when the FOMC has ended or signaled that it would soon end a period of highly accommodative policy,” Yellen went on to say at the December 2012 meeting, adding that “we could see such shifts again.”
Bernanke attempted to reassure.
“In 1994, the problem was that nobody had any idea what the future path of the federal funds rate was going to be after the initial increase,” he said, referring to a historical episode that Yellen had mentioned in which interest rates rose sharply. “Here, we are telling the public presumably under what conditions or on what date rates will start to rise. That has certainly got to provide some comfort that rates are not going to rise more quickly than expected.”