Today the Fed released minutes of meetings at the start and during the great financial crisis. These minutes show how clueless the Fed Governors were at the start of the recession.
Here is a list of FOMC Transcripts and Other Historical Materials, 2008
- I purposely cherry picked statements of various Fed governors. There was much more gloom in the early minutes than I show below. Yet, the consensus opinion, even though the recession had already started, was that a recession would be avoided.
- Amazingly, Bernanke spoke of pent-up demand for housing in January of 2008
- The January 29-30 transcript was a whopping 194 pages long. I slogged through most of it. Some outside consultants presented to the Fed at that meeting, generally giving an amazingly rosy view of the world as well.
January 9, 2008: Telephone Conference Meeting of the Federal Open Market Committee
Staff Report: The incoming data on spending and production have, on net, led us to revise up our estimate of real GDP growth in 2007:Q4 by about 1-1/4 percentage points relative to the December Greenbook.January 21, 2008: Conference Call of the Federal Open Market Committee
Much of the upward revision is in consumer spending and reflects the November figures on retail sales and PCE services. In addition, the construction put-in-place data for November imply a sizable upward revision to our estimate of nonresidential construction in Q4.
For purposes of this update, we have not made any changes to our assumptions for the federal funds rate. In particular, the forecast update is predicated on the assumption that the funds rate will be held steady at 4¼ percent through mid-2009 and then lowered by 25 basis points in the second half of that year.
Real GDP growth is lower in 2008 and 2009 than in the December Greenbook, though the level of real GDP at the end of 2009 is only a bit lower than in the last Greenbook, reflecting the upward revision to our estimate of real GDP growth in 2007:Q4.
Mr. Lacker: Can you explain that third consequence of monoline downgrades? IJanuary 29–30, 2008: Meeting of the Federal Open Market Committee
didn’t quite get that.
Mr. Dudley: The monoline insurers don’t have to mark to market the consequences of the deterioration in, say, the structured-finance product they insured. All they have to do is pay out, as it is incurred, the interest that the structured-finance product can’t pay out. So their losses are going to be realized only very gradually over a long period of time.
Bernanke: Many of you have valid concerns about inflation. Let me just make a few comments on that. First, in the Greenbook, despite a 100 basis point drop in the rate assumption and the scenario that I take as being in some sense optimistic in that it avoids an outright recession, the preliminary Greenbook forecast for 2009 has total PCE inflation at 1.7 percent and core PCE inflation at 1.9 percent . This does not take into account any disinflationary effects that would arise if we did have an NB ER recession or worse. Again, I note that we have, for example, effects working through oil prices, which the Greenbook doesn’t take into account directly. So I think, obviously, that we have to continue to watch inflation and inflation expectations carefully.
Mr. Reifschneider: Not all the news was bad. Nonresidential construction activity has continued to be surprisingly robust, and defense spending looks to have been higher last quarter than we anticipated. Moreover, retail sales in November came in stronger than we predicted, and the figures for September and October were revised up. Overall, we read the incoming data as implying an increased risk of recession.March 10, 2008: Conference Call of the Federal Open Market Committee
As you know, we are not forecasting a recession. While the model estimates of the probability of recession have moved up, they are not uniform in their assessment that a recession is at hand. Another argument against forecasting recession is that, with the notable exception of housing, we see few signs of a significant inventory overhang. In addition, the recent weakness in the labor market and spending indicators is still limited; for example, initial claims have drifted down in recent weeks rather than surging as they typically do in a major downturn. Finally, a good deal of monetary and fiscal stimulus is now in process that should help support real activity. That said, it was a close call for us.
Mr. Sheets: Going forward, we see the external sector contributing 0.5 percentage point to GDP growth in 2008 and 0.3 percentage point in 2009. Exports are expected to expand at a crisp 7¼ percent pace in both years, supported by stimulus from the weaker dollar.
Mr. Evans: My modal outlook for 2008 is close to that in the Greenbook. I expect that we will eke out positive growth in the first half of 2008. This expectation largely reflects the judgment that businesses have not begun to ratchet down spending plans in the nonlinear fashion that characterizes a recession. Our cumulative actions following this meeting should provide noticeable stimulus to the economy by midyear.
Mr. Rosengren: Our forecast returns to full employment by 2010 only if we reduce interest rates more than they are i n the Greenbook. Thus, our baseline forecast assumes that we reduce rates 50 basis points at this meeting followed by additional easing in 2008 , which eventually results in core inflation below 2 percent and the unemployment rate settling at our estimate of the NAIRU, somewhat below 5 percent.
Vice Chairman Geithner: Thank you, Mr. Chairman. Let me just start by saying it’s not all dark. [Laughter]
Mr.. Mishkin: Don’t worry; be happy?
Vice Chairman Geithner: I’m going to end dark, but it’s not all dark. The world still seems likely to be a source of strength. You know, we have the implausible kind of Goldilocks view of the world, which is it’s going to be a little slower, taking some of the edge off inflation risk , without being so slow that it’s going to amplify downside risks to growth in the United States. That may be too optimistic, but the world still is looking pretty good.
Central banks in a lot of places are star ting to soften their link to the dollar so that they can get more freedom to direct monetary policy to respond to inflation pressure. That’s a good thing. U.S. external imbalances are adjusting at a pace well ahead of expectations. That’s all good, I think. As many people pointed out, the fact that we don’t have a lot of imbalances outside of housing coming into this slowdown is helpful.
Mr. Kohn: Thank you, Vice Chairman Geithner, for a little less gloom here. I didn’t expect the bright side from that source. [Laughter] Like everyone else around the table, I have revised down my forecast, which looks very much like the Greenbook: a couple of quarters of very slow growth before a pickup in the second half of the year spurred by monetary and fiscal stimulus.
My forecast for 2008 was revised down only a few tenths from October. But that is because of the considerable easing of monetary policy undertaken and assumed in my forecast. I assumed 50 at this meeting, and unlike that piker, President Yellen, I assumed another 50 over the second quarter.
MS. Yellen: I’ll see you and up you. [Laughter]
Mr. Mishkin: My view on the economy is that we are going to have quite a weak first part of 2008 , in which we’re going to skirt recession. This is my modal forecast. I do think that the economy will be stronger in 2009 and 2010, but that’s because I decided to be even less of a piker than Governor Kohn. He accused President Yellen, but I was going to accuse him because I did actually assume a 75 basis point cut at this meeting and then another 50 basis point cut at the meeting following. Then I hoped that afterward we would be able to reverse.
Chairman Bernanke: Now, the central issue here, though, ultimately comes back to the housing market. Certainly by this point there must be some pent-up demand for housing. We’ve had obviously very low sales for a period. House prices are soft. Mortgage rates are low. Affordability is better. What’s keeping people from buying houses is the fact that other people aren’t buying houses. If there were some sense that a bottom was forming in the market or in house prices, we probably could actually see a pretty quick snap-back, an increase in housing demand, and that in turn would feed back into the credit markets, I think, in a very beneficial way. So there’s the possibility that, if the housing market can get restarted , we could get a relatively benign outcome.
Chairman Bernanke: Good evening, everybody. I am sorry, once again, to have to call you together on short notice. We live in a very special time. We have seen, as you know, significant deterioration in term funding markets and more broadly in the financial markets in the last few days. Some of this is credit deterioration, certainly, given increased expectations of recession ; but there also seem to be some self-feeding liquidity dynamics at work as well. So the question before us is whether there are actions we can take, other than monetary policy, to break or mitigate this adverse dynamic. There are two actions on the table, which I think we should just try to consider together, if possible. The first is the proposed term securities lending facility — I know you received the documentation on this without much notice, but we will get some explanation in the meeting. The second item — we have received formal requests from the European Central Bank (ECB) and from the Swiss National Bank (SNB) to expand and extend the currency swap lines that we have with them.Bernanke was clearly worried about inflation as late as January 2008.
By March, panic set in with emergency measure after emergency measure and an alphabet soup of Fed programs, culminating in numerous unsound bailouts, fiscal stimulus, 10% unemployment, the complete collapse of the monolines (reinsurance companies like MBIA and Ambec), and ultimately the collapse of Lehman.
At no point has any Fed official admitted causing this financial mess due to their bubble-blowing policies. They did not see the last crisis or dot-com bubble in 2000 either.
The Fed will not see the next crisis either.
A global currency crisis awaits, most likely coupled with another stock market crash.
Mike "Mish" Shedlock