Transcripts show Federal Reserve underestimated financial crisis in 2007
WASHINGTON — Federal Reserve officials in 2007 underestimated the scope of the approaching financial crisis and how it would tip the economy into the worst recession since the Great Depression, transcripts of the Fed's policy meetings that year show.
The meetings occurred as the country was on the brink of the worst financial crisis since the 1930s. As the year went on, Fed officials shifted their focus away from the risk of inflation as they slowly began to recognize the severity of the crisis.
During 2007, the Fed began to cut interest rates and took extraordinary steps to ease credit and shore up confidence in the banking system. Throughout the year, the housing crisis deepened. Banks and hedge funds that had invested big in subprime mortgages were left with worthless assets as foreclosures rose. The damage reached the top echelons of Wall Street.
At the Fed's Oct. 30 policy meeting, Janet Yellen, then-president of the Federal Reserve Bank of San Francisco, said the economy faced increased risks. But she hardly predicted anything dire.
“I think the most likely outcome is that the economy will move forward toward a soft landing,” Yellen said.
Chairman Ben Bernanke noted that housing was “very weak” and manufacturing was slowing.
“But except for those sectors, there is a good bit of momentum in the economy,” he said.
Bernanke did acknowledge that there was “an unusual amount of uncertainty” surrounding the Fed's economic forecasts.
“In the aggregate data, there is yet no clear sign of a spillover from housing,” he said in summing up the views of the committee.
By December, the economy had plunged into the recession, which would last until June 2009. Five years later, the economy has yet to fully recover.
The Fed did take action in 2007, although investors seemed to think it waited too long. Markets were disappointed when the Fed refused to cut interest rate cuts at its Aug. 7 meeting. After the meeting, the Fed issued a statement declaring that the threats to growth had “increased somewhat.”
At the meeting, various Fed officials signaled their belief that the biggest threat facing the economy was inflation — not slower growth, the transcripts show.
Days later, BNP Paribas, France's largest bank, announced that it was suspending withdrawals from three investment funds, a move that jolted financial markets around the world.
On Aug. 10, the Fed held the first of three emergency conference calls to discuss the emerging crisis. The committee announced that it would pump billions of dollars into financial markets to try to calm turmoil on Wall Street and ease the tightening of credit.
One week later, the Fed called an emergency meeting to slash the discount rate on loans to banks.
Then in September, the Fed cut its key short-term interest rate for the first time since June 25, 2003. The Fed would ax the rate two more times in 2007 as the financial crisis worsened.
Still, the transcripts showed the central bank struggled through the year to develop a clear sense of how serious the unfolding crisis could be and what harm it might do to the U.S. economy.
At the Fed's final meeting of that year in December, the central bank's staff presented an economic forecast for 2008 that proved to be overly optimistic.
And despite concerns about the lending market and the quality of loans, particularly in real estate, Bernanke predicted that no major bank would fail.
“The result of this is that, although I do not expect insolvency or near insolvency among major financial institutions, they are certainly going to become more cautious.”
In March 2008, investment banking giant Bear Stearns was rescued with the help of Fed support. In the fall, mortgage giants Fannie Mae and Freddie Mac were taken over by the government, and the collapse of Lehman Brothers in September 2008 set off a full-blown financial panic.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Developer hopes to make Allegheny Center a tech hub
- BNY Mellon promotes executive
- Murray Energy expects to lay off as many as 1,800 more
- McDonald’s CEO ‘proud’ of pay hike
- Equifax, Experian, TransUnion agree to improve fixing mistakes on credit reports, OK $6M settlement
- Home sales slipped in April on tight supply, high prices
- BNY Mellon to pay $180M to end foreign-exchange lawsuit
- IRS refunds $10M to tax preparers who paid to take competency test
- Fewer Pittsburgh-area hospitals lost money last year, agency reports