Henry Paulson Sees Volatility, Pain as Fed Programs Phased Out

June 29, 2013 Leave a comment

Henry Paulson Sees Volatility, Pain as Fed Programs Phased Out

Phasing out the Federal Reserve’s stimulus and monetary accommodation will cause some market volatility and pain, said former U.S. Treasury Secretary Henry Paulson.

The Fed (FED) has been making $85 billion in monthly bond purchases and holding the key interest-rate target near zero to spur job growth and faster U.S. economic expansion. The central bank will probably taper its asset purchases later in 2013 and stop them around mid-2014 as long as the economy performs in line with its projections, Chairman Ben S. Bernanke said June 19.“When you have a big, ugly problem, there’s never going to be a neat, elegant solution that is totally painless or without a cost,” Paulson said in an interview on CNBC today. “It’s just completely unrealistic to assume that those programs could be phased out without some market volatility and some pain because market participants, some of them are addicted to these abnormally low interest rates.’’

After a slump last week, U.S. stocks rallied for a third day as economic data indicated Fed policy makers can continue to provide additional stimulus to the economy.

“We need to get our economy growing faster than 2 percent. We need to deal with the deficit,” Paulson said. “The only way you’re going to do that is bipartisan compromise.”

Revised data from the Commerce Department yesterday showed the world’s largest economy grew at a 1.8 percent annualized rate in the first three months of the year as consumer spending climbed at a 2.6 percent pace. Both estimates were lower than previously calculated.

China Economy

Asked about China, Paulson said that country is willing to tolerate slower growth while it fixes its financial system.

China’s stocks have plunged on concern a cash squeeze is hurting economic growth. The Shanghai Composite Index (SHCOMP) is trading at four-year lows, while the CSI 300 Index entered a bear market on June 24.

“The economy is now so big and so complex, it’s difficult to manage with this combination of administrative means and market means,” Paulson said. Chinese leadership is “committed to moving more toward markets and less toward top-down planning, but there’s a lot they need to do.”

Paulson said the credibility of Chinese economic statistics “has always been an issue.”

‘Growing Fast’

“We know that it’s been growing fast for a long time,” Paulson said. “But the exact numbers, that’s a problem. And the government’s aware of that. They’re doing everything they can to get more accurate numbers.”

Paulson, 67, former chief executive officer of Goldman Sachs Group Inc., served as Treasury secretary from 2006 to 2009, during the worst of the financial crisis.

Since leaving the Treasury, Paulson has served as chairman of the Paulson Institute, a Chicago-based nonpartisan center he founded in 2011 to promote sustainable economic growth and a cleaner environment, which has focused on the U.S. and China.

To contact the reporter on this story: Alexandria Baca in Washington at abaca3@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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