By Jon Hilsenrath, Pedro Nicolaci da Costa,Ben Leubsdorf,Kate Davidson and Josh Zumbrun
Janet Yellen was doubtful in 2009 that an emerging U.S. economic
recovery would be at all robust and argued regularly for the Fed to
ramp up its efforts to boost growth, according to transcripts of
2009 policy meetings released by the central bank Thursday.
A preliminary reading of the Fed's transcripts of its policy
meetings, released Thursday, reveals fully for the first time the
fraught debates at turning points in the aftermath of the financial
crisis that nearly wrecked the U.S. economy.
"The economic and financial news has been grim," Ms. Yellen said
at a crucial March 2009 policy meeting when the Fed increased its
efforts to boost the economy. "Things are now so bad that I
actually open [Fed's staff] economic projections with greater
trepidation than my 401(k)."
Ms. Yellen, who was then President of the Federal Reserve Bank
of San Francisco and went on to become Fed chairwoman in 2014,
offered at the March 2009 policy meeting a dire analysis of the
longer-run economic outlook. The Fed decided at the meeting to buy
$300 billion in U.S. Treasury securities, $1.25 trillion in
mortgage backed securities and $200 in debt issued by Fannie Mae
and Freddie Mac, a massive increase in its efforts launched as
markets deteriorated.
In April, she argued the economic outlook was still "fraught
with peril" and called for the Fed to ramp up its bond-buying
program, which came to be known as "quantitative easing."
"Now that we've tested the waters, it's time to wade in by
substantially increasing our purchases of Treasury securities," Ms.
Yellen said. "I prefer to take appropriate, bold action to
stimulate the economy sooner rather than later."
Ms. Yellen didn't win the argument that day, but the Fed would
end up engaging in several more rounds of bond buying in the coming
years.
The Yellen that emerges in the 2009 meetings is an unmistakable
policy "dove," meaning somebody who argues forcefully for easy
money policies. It contradicts, to a degree, her approach since
last year as Fed chairwoman, when she has sought to build consensus
and hasn't staked out sharp policy positions at odds with other
policy makers.
The Fed's bond program became one of the more controversial
facets of officials' efforts. The Fed struggled with later
decisions to resume the programs. Some economists doubt they had a
big impact on the economy. Others said they distorted markets and
risked spurring inflation or financial excesses.
Ms. Yellen's views were colored by a dim view of the economic
outlook. She said in September, the recovery, "will be tepid by
historical standards, leaving unemployment unacceptably high for a
long time to come,"
Ironically, among her concerns were that Fed policies were less
powerful than they had been in the past. Because the banking system
was so fragile, she argued in March, the low interest rates that
the Fed engineered were less likely to boost growth. Still, rather
than back off the use of these policies, she pressed for more.
By December, after it was clear a recovery was in hand, she
worried about the Fed ending its bond purchases prematurely.
"We just don't know what will happen to [mortgage-backed
securities] spreads and mortgage rates as we wind down our
purchases over the next several months," she said in December.
"Many market participants expect rates to spike up considerably.
And if that happens when the economy is still very weak, and the
housing markets remain fragile, I think we may need to resume
purchases."
The Fed launched a new bond program in November 2010.
The Wall Street Journal has documented that Ms. Yellen correctly
foresaw a weak recovery at the early stages, a forecast that led
her to call for aggressive easy-money policies through much of the
aftermath of the crisis.
Ms. Yellen had her share of misjudgments, under-estimating at
times how long it would take for the economy--and monetary
policy--to get back to normal.
At one point in the March meeting, she said the Fed might be
raising short-term interest rates by 2012. Rates today remain near
zero, where the Fed put them in December 2008. Ms. Yellen is
leading efforts to begin raising them later this year.
Some officials were much less prescient. Philadelphia Fed
President Charles Plosser said on April 28 his forecast for
inflation "requires that we begin raising the funds rate by the end
of this year, certainly by early next year, and then continue to
raise it throughout the forecast period. I have it reaching 3 1/2
percent by the fourth quarter of 2011." The fed funds rate, the
central bank's benchmark short-term rate, has remained near zero
since December 2008. Many officials expect to start lifting it
later this year.
The transcripts posted on the Fed's website also shed light on
how former Fed Chairman Ben Bernanke handled key decisions,
including a controversial move that March to ramp up the
bond-buying program that came to be one of central bank's signature
responses to the crisis.
Central bank officials began 2009 in a panic, scrambling to
rescue banks and launch rescue programs as financial markets and
stock prices tumbled. By year-end, Mr. Bernanke had been nominated
for another four-year term as Fed leader and named Time Magazine's
"person of the year" with an economic recovery appearing to be in
hand.
The National Bureau of Economic Research eventually pegged the
end of the recession in June 2009. The national unemployment rate
hit a peak of 10% in October 2009, then began to slowly decline.
And the Dow Jones Industrial Average bottomed out in March
2009.
The latest transcripts cover the 11 meetings--eight scheduled
and three unscheduled--in 2009 of the Fed's policy making Federal
Open Market Committee. The group releases a statement shortly after
each meeting announcing its policy decision, and three weeks later
releases minutes summarizing the meetings without identifying
individuals by name or quoting them. The Fed releases the FOMC
transcripts five years after the meetings, revealing for the first
time exactly what individual Fed officials said as they debated
policy.
Participating in the meeting are members of the Fed's
seven-member Washington-based board of governors, presidents of the
12 regional reserve banks and senior central-bank staff.
This year's release comes at potential inflection point for the
central bank as lawmakers consider a host of proposals that would
subject the Fed to additional congressional scrutiny or restructure
it. The new documents could shed new light on who was wrong and who
was right inside the central bank as it tried to find a way out of
crisis. That in turn could shape proposals on how Congress might
want to change it.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Josh
Zumbrun at Josh.Zumbrun@wsj.com
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