WASHINGTON – The additional monetary stimulus that was approved by the Federal Reserve in 2010 reflected the U.S. central bank’s concern about the economy falling into Japanese-style deflation, a transcript released Friday of a policy board’s meeting at the time suggests.
“Given this very slow growth outlook, I think there are several grounds on which we might consider additional stimulus at this juncture,” then-Fed Chairman Ben Bernanke said during the meeting of the Federal Open Market Committee on Nov. 2 and 3, 2010. “A deflationary trap also could be very long-term, as Japan’s ‘lost decade’ suggests.”
The Fed and other major central banks were fighting to save the world economy from the impact of a financial crisis triggered by the 2008 implosion of the U.S. housing market and the near collapse of its banking industry.
That FOMC meeting was held after the Fed ended in June 2010 the first round of quantitative easing, which pumped money into the economy through massive asset purchases to underpin growth.
While other board members expressed reservations at the meeting about resuming the monetary stimulus, Bernanke pressed for his plan, saying that “taking no action has risks,” the transcript shows. The second round of quantitative easing approved at that meeting lasted until June 2011.
Janet Yellen, the current Fed chief, backed Bernanke’s plan as vice chairwoman of the FOMC, saying large-scale asset-purchase programs “are not a panacea, but they can make a meaningful difference,” the transcript showed.
The transcripts released Friday show that in the fall of 2010, officials of the Federal Reserve were worried not just about a sluggish economy but also about infighting at the Fed and possible leaks of sensitive information.
The transcripts reveal that Bernanke told members of the Fed’s top policy group at the Nov. 2 meeting that he was concerned about reports of leaks to the news media and to financial market players. He also expressed concerns about Fed officials taking “very inflexible positions” in advance of Fed meetings.
At the meeting on Nov. 2 and 3, 2010, Bernanke stressed the “considerable risk” the Fed faced if sensitive material was released. He also talked about the importance of not sending confusing signals to financial markets about internal Fed discussions. In an effort to address the problems, Bernanke said he was appointing a subcommittee headed by Yellen to explore ways to improve communications.
At the November meeting, the Fed approved the purchase of $600 billion of Treasury bonds at a rate of $75 billion per month in an effort to stimulate the economy by pushing long-term interest rates down further.
The measure was approved by a vote of 10-1. Thomas Hoenig, president of the Fed’s Kansas City regional bank at the time, opposed the move. However, the transcripts showed that other Fed officials questioned whether the new round of bond purchases would be effective.
Kevin Warsh, a Fed board member at the time, said he was worried about the risks to the economy from further bond purchases but said he would not dissent because he did not want to undermine the chances the program would succeed.
“My respect for you during this last four and a half years is incredibly high,” he told Bernanke at the November meeting. “I am awed by the burdens you are confronting and I wouldn’t want to undermine at this important moment the chance that this program could be successful.”
One of the strongest voices supporting Bernanke’s efforts to launch more bond purchases was Yellen, who became Fed vice chair in 2010 and succeeded Bernanke as head of the central bank in February 2014.
“The long slog we had been expecting in the spring now looks even longer and more painful,” Yellen said during a September discussion in which she urged more Fed support for the economy. “We’re recovering from the worst global and economic financial meltdown since the Great Depression.”
But Hoenig, in explaining his opposition in November, said, “I strongly disagree with the course being charted today. … We may see some short-run improvement but not long-run.”
In his book “The Courage to Act,” published last year, Bernanke said he was “irked” by comments Hoenig made in a newspaper interview the next day criticizing the Fed’s move. Bernanke said he was also surprised by the amount of criticism the decision generated from conservative economists and Republican leaders in Congress.
But he defended the bond purchases as the right call at a time when the Fed had reduced its key interest rate as far as it could.
The Fed had announced an initial bond buying program in 2008 at the height of the financial crisis. But with the recovery lagging, the central bank decided more needed to be done. It launched a second bond program in November 2010.
There would be a third round of bond purchases announced in September 2012. All together, they would push the Fed’s balance sheet to an unprecedented level of $4.5 trillion, a four-fold increase from the Fed’s holdings before the start of the financial crisis in the fall of 2008.