WASHINGTON — Transcripts of Federal Reserve meetings in 2009 showed central bank officials struggling to contain the worst financial crisis in seven decades and searching for the right policies to halt a deepening economic downturn.
The transcripts released Wednesday revealed that officials were worried about the precedents being set by providing billions of dollars of government support to the nation’s largest banks. They also searched for ways to provide support to an economy that seemed to be in free fall at the beginning of the year. Current Fed Chair Janet Yellen was particularly spot-on in her predictions for a weak recovery and her insistence that the world’s biggest economy needed more help.
During an emergency call on the morning of Jan. 16, 2009, after the government had announced a $20 billion bailout for Bank of America, then-Fed Chairman Ben Bernanke declared that he was unwilling to allow “the failure of a firm the size of Bank of America.”
The call underscored the chaotic situation facing the Fed and other government agencies as they confronted a financial crisis that had ignited in September with the takeover of mortgage giants Fannie Mae and Freddie Mac and the collapse of Lehman Brothers in the largest bankruptcy in U.S. history. The Bush administration scrambled to assemble a $700 billion bailout fund that Congress approved to try to stabilize the financial system.
Bernanke apologized to the group for not informing them about the details of the Bank of America rescue before it was publicly announced. He said officials had moved up the announcement at the request of the bank, which was worried about deteriorating market conditions.
The country’s economic downturn was hitting with full force in early 2009. The economy contracted sharply, with job losses averaging 774,000 in the first three months of the year and the Dow Jones industrial average plunging to a low of 6,440 on March 9.
Faced with the turmoil in financial markets and rapidly rising unemployment, Fed policymakers at their March 17-18 meeting decided to expand by $1.2 trillion a bond purchase program it had begun in November. The goal of the unprecedented effort was to push long-term interest rates lower to give the economy a boost at a time when the Fed’s main policy lever, short-term interest rates, had already been pushed as low as they could go near zero.
Over the next five years, the Fed’s purchases of Treasury bonds and mortgage-backed securities would expand its balance sheet to $4.5 trillion, a nearly five-fold increase from where the balance sheet stood before the financial crisis hit in the fall of 2008. The Fed did not end the bond purchases until last October.
At the March 2009 meeting, the transcripts showed policymakers were worried that the bond buying program would not be big or bold enough to restore confidence.
“The only thing worse than buying Treasurys is to buy them in such a tepid way that we don’t have any effect,” said Fed Governor Kevin Warsh. “I think if we’re in, we’re in. We’re crossing the Rubicon.”
By the April 28-29 meeting, the transcripts show Fed officials took note of signs that the economy had stabilized somewhat.
“There have been some initial signs that the recession may be approaching a trough,” said Eric Rosengren, president of the Fed’s Boston regional bank.
Yellen, who at the time served as president of the Fed’s San Francisco bank, called it a “welcome relief” that the economic data since the previous meeting wasn’t uniformly disappointing. But she cautioned against overreacting to the slightly better news, particularly since data about the job market was “appalling.”
“I am particularly concerned that another shoe may drop,” she said. “Confidence in global financial markets is extremely fragile, and more bad news could trigger another panic and run on the financial system.”
Given the struggles the global economy has faced in the years since the Great Recession, Yellen’s comments proved particularly prescient.
“Unfortunately, the road ahead is littered with headlines of defaults, bankruptcies and rising unemployment,” she said.
Not all the Fed officials proved to be as successful in forecasting the future. Then-Philadelphia Fed President Charles Plosser expressed concerns at the April meeting about rising inflation and pressed the central bank to begin raising interest rates by late 2009 or early 2010.
“We cannot keep the funds rate at zero for the next three years and expect to achieve anything close to our inflation objective,” Plosser said. As it turned out, the Fed has still not raised its short-term interest rate, and inflation has yet to become a problem. It continues to run below the Fed’s 2 percent target.
Meanwhile, Yellen’s pessimism about the economy extended into June.
“The outlook over the next several years remains disturbing… It’s a sign of how bad things really are that near euphoria broke out with the announcement of 345,000 nonfarm jobs lost in May.”
The 2007-2009 recession did end in June in the United States, although the milestone would not be officially declared until sometime later. Unemployment kept rising, hitting a high of 10 percent in October.
By the end of 2009, the transcripts showed that Fed officials saw signs that the economy was on the mend. Employers cut only 11,000 jobs in November, compared to a loss of 111,000 jobs in October. The Fed’s staff economists were projecting that employers would be adding more than 200,000 jobs per month by the middle of 2010, well above the actual monthly average of 88,833 that year.
However, Yellen told the group at the December meeting that she remained worried.
“My contacts are more likely to be considering continued layoffs rather than any substantial hiring,” she said. “Indeed, one of them said, ‘It’s become fashionable not to be hiring.’ “
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