WASHINGTON — Federal Reserve officials faced the worst of the Great Recession in early 2009: a collapsing economy hemorrhaging jobs, a plunging stock market and banks saddled with bad debts, refusing to lend.
Transcripts from the Fed’s 11 meetings that year, released Wednesday, reflected the grim headlines. Officials recited a string of anecdotes and statistics starkly portraying the depths of the downturn. Gallows humor surfaced as new Fed members were offered chances to resign immediately.
Yet the transcripts also show that then-Chairman Ben Bernanke and other Fed policymakers were quicker to grasp the magnitude of the downturn than in previous years.
By the middle of the year, the transcripts showed that even as Fed officials accurately sensed the economy was emerging from the slump, they held out little hope for a rapid recovery.
In their January meeting, Fed officials were under no illusions about what they faced.
“We had expected a dreadful holiday retail season, and that is precisely what we got,” said Janet Yellen, then president of the San Francisco Federal Reserve Bank and now chair of the Fed.
On an emergency conference call in February, Dallas Federal Reserve Bank President Richard Fisher said of Japan: “Industrial production is down 30 percent. The last time that happened … was when Godzilla destroyed Tokyo in a movie in 1954.”
Things weren’t looking much better by March. “There are 175,000 railcars that are out of commission,” Fisher said. “The chairman of the retail federation estimates that, of 1,100 major malls in the United States, a third will fail over the course of the next three years. This is not happy news.”
Transcripts from 2008 and 2007 showed that many Fed officials consistently underestimated the severity of the financial crisis and recession they were facing. In 2009, unfortunately, their increasingly bleak forecasts were becoming more accurate.
“We’re looking at an unemployment rate … of about 8.5 percent in 2½ years,” said then-Fed governor Donald Kohn in June. “The risk is that we could be caught in a … low-inflation or even deflationary environment.”
Two and a half years later, in January 2012, the unemployment rate was 8.3 percent. And even now, more than five years later, inflation remains far below the Fed’s 2 percent target.
Not every forecast was right, of course. Philadelphia Fed president Charles Plosser worried in April 2009 that inflation could soon rise. He said the Fed should raise the short-term interest rate it controls in late 2009 or 2010.
“We cannot keep the funds rate at zero for the next three years and expect to achieve anything close to our inflation objective,” he said. Yet, six years later, the Fed’s benchmark rate is still zero.
