Behind the scenes at the Fed in a year of crisis

Published on NewsOK Modified: February 21, 2014 at 4:07 pm •  Published: February 21, 2014
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During an emergency conference call March 10, Vice Chair Donald Kohn noted that banks in developing countries, long dependent on credit from rich countries, were reluctant to lend to the United States and Europe. "I think I will pause there for the irony to sink in for a second."

— BOLSTERING YELLEN'S REPUTATION

The 2008 transcripts help confirm Yellen's reputation as a savvy economic forecaster.

At the Jan. 28-29 meeting, Yellen warned that the economy was facing perilous times because of the bursting of the housing bubble and the shockwaves that had coursed through the banking industry. "The severe and prolonged housing downturn and financial shock have put the economy at, if not beyond, the brink of recession," Yellen said.

She said she had downgraded her economic outlook "substantially" since the Fed's meeting the previous month. The weakening in the job market was "quite typical of patterns seen when the economy is tipping into recession," she said.

Yellen's dim outlook contrasted with some rosier assessments from other Fed officials. And the Fed staff delivered an economic report that did not forecast a recession, noting an absence of excess inventories outside of housing.

The National Bureau of Economic Research, the group of economists that determine when recessions began, would later declare that the recession had already begun by the time of the January Fed meeting. They determined that the Great Recession had begun in December 2007 and ended in June 2009.

In December 2007, Yellen had also expressed concerns about growing dangers and failed to persuade her Fed colleagues to back a half-point cut in interest rates. The Fed's policy committee instead approved a smaller quarter-point reduction in interest rates.

The December 2007 transcripts show Yellen saying, "Any more bad news could put us over the edge, and the possibility of getting bad news — in particular, a significant credit crunch — seems far from remote."

As 2008 unfolded, Yellen's concerns about a credit crunch proved correct.

— USING DIFFERENT LANGUAGE IN PUBLIC

At the March 18 meeting, Mishkin, who resigned later that year to return to teaching at Columbia University, said he felt the country was in a serious financial crisis, though he said he didn't use the word "crisis" in public:

"We are in a financial crisis, and it is worse than we have experienced in any other episode of financial "disruption," which is the word I use. I will not use 'financial crisis' in public. 'Financial disruption' is still a good phrase to use in public, but I really do think that this is a financial crisis. It is surely going to be called that in the next edition of my textbook."

Earlier, Mishkin had missed a January emergency call because he was "on the slopes."

"I think in Idaho somewhere," Bernanke said.

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