Bleak economy, gallows humor: Fed transcripts from 2009 provide window into crucial year

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 immediately resign.

Yet the transcripts also show that then-Fed 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.

As always, humor cropped up frequently. Here are some highlights:


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. "Many of my business contacts are reporting layoffs and wage freezes. ... The residential housing sector has now shrunk so much that the only real assurance that it will ever stabilize seems to be the fact that construction spending cannot go negative."

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 become more accurate.

"We're looking at an unemployment rate ... of about 8½ percent in two and a half 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.

The transcripts show some signs of growing humility, as Fed officials realized that their previous forecasts were wrong.

"I recall October 2007 when our statement essentially declared the financial crisis to be over, and again, in the summer of 2008 when we were expecting growth and recovery, and then we got hit with calamities in September and October," Bernanke said in June.


The transcripts also show the Fed's entanglement, perhaps unavoidably, with politics. In February, Bernanke briefed other Fed members on the Obama administration's plan to stabilize the banks: "The political strategy is to provide an overall structure with some detail, but not a great deal of detail," Bernanke said. "It's like selling a car: Only when the customer is sold on the leather seats do you actually reveal the price."


As always, Fed officials found plenty of opportunities for humor, even from something as simple as the mispronunciation of Yellen's name.

"I agree with Presidents Evans and Yeltsin_Yellen," said Eric Rosengren, president of the Federal Reserve Bank of Boston, in the September meeting.

"I've gone drinking with Janet. She's no Yeltsin," Fisher replied.

Elizabeth Duke, a Fed governor, in March expressed concern about financial assets the Fed was purchasing from banks in an effort to shore up their balance sheets.

"I really get concerned that the Fed ends up getting stuck trying to digest every hairball that's out there in the marketplace," Duke said. "That's a technical term, 'hairball.'"

And in February, Fisher welcomed Daniel Tarullo to the Fed, who had just joined a week earlier.

"May I just take this opportunity to welcome Governor Tarullo on board and give him an option to leave if he decides to do so," Fisher said.

"I'd like to point out Governor Tarullo has a 14-year term," Bernanke said.

"Sentence?" Duke asked.

"A term, not a sentence," Bernanke responded.


Associated Press writers Martin Crutsinger, Paul Wiseman, Josh Boak and Tomoko A. Hosaka contributed to this report.