The transcripts from 2008 are quite long. I’ve only had time to read the 108 page transcript for September 2008, but already notice some interesting patterns. Here’s a fairly typical comment (from Kohn):
Not all news affecting spending has been negative. Capital goods orders have held up. The decline in interest rates and commodity prices that respond to the markdown in global growth will help support domestic demand . . .
Many other participants made similar comments. Now in fairness there are cases where these factors can help. It depends why oil prices and long term interest rates are falling. But I am nonetheless struck by the lack of curiosity on this issue. The participants didn’t seem willing to even entertain as a hypothesis what we now know was the actual cause of these price changes, NGDP was falling of a cliff in the June to December period. Falling oil prices and falling long term interest rates were actually exceedingly bad news, reflecting plunging demand for oil in the US and elsewhere, and plunging demand for credit in the US. Everyone seemed to assume they were good news.
Perhaps the FOMC bought into the view that the EMH was bunk. Hence asset prices were plunging for irrational reasons, and thus were a boon to consumers.
I was also somewhat puzzled by their reaction to the plunging TIPS spreads, which had fallen to 1.23% over 5 years by the day of the meeting (a number that was pretty accurate, in retrospect.) Here’s the staff economist Dave Stockton:
We continue to see reasonably encouraging signs on inflation expectations. The medium-term and long-term inflation expectations in the preliminary Michigan report last week dropped 0.3 percentage point, to 2.9 percent. TIPS haven’t really done very much, and hourly labor compensation continues to come in below our expectations.
That’s simply inaccurate, which is scary when you consider that the members of the FOMC rely on the staff economists for guidance as to the data. Later in the meeting Janet Yellen correctly notes that TIPS spreads were falling fast:
Furthermore, we have seen a remarkable decline in inflation compensation for the next five years in the TIPS market.
Elsewhere some people referred to the relatively stable 5 year, 5 year forward TIPS spread, so perhaps that’s what Stockton was referring to. But that’s the wrong data point to look at during a crisis. Didn’t Keynes say something about the sea becoming calm after the storm was over?
I’ve never trusted RGDP data as much as either industrial production or real gross domestic income data. Thus I was interested in this comment by Stockton:
Now, this sharp rise in the unemployment rate is a bit difficult to square with a GDP figure that looks as though it was running above 3 percent in the second quarter and even 2 percent if you want to average the first and second quarters together. There are occasionally large errors in Okun’s law, as I think I’ve noted in the past. It seems as though Okun’s law gets obeyed about as frequently as the 55 mile an hour speed limit on I-95. [Laughter] But still, one of the things that we should probably be considering is that perhaps the economy has not been as strong as suggested by the real GDP figures. Real gross domestic income, which is output measured on the income side of the accounts, has risen about 2 percentage points less than GDP over the past year. And if we look at industrial production and compare that with the components of GDP that are, in essence, goods production, there’s about a 1 percentage point discrepancy there, with industrial production suggesting weaker figures than GDP.
The real GDP numbers for the first half of 2008 have been revised sharply lower, and hence we now know the other data was more accurate. If the Fed had ignored the RGDP data and focused on the more negative information, they might have behaved differently in the second half of 2008
If not, let me just make a few comments. Personally, I see the prospects for economic growth in the foreseeable future as quite weak, notwithstanding the second quarter’s strength. I think what we saw in the recent labor reports removes any real doubt that we are in a period that will be designated as an official NBER recession. Unemployment rose 1.1 percentage points in four months, which is a relatively rapid rate of increase.
In the US, that sort of rise in unemployment means recession 100% of the time. Bernanke was correct in assuming we were in recession, but did not draw the correct policy implication.
Bernanke also noted that some of the rise in the unemployment rate was presumably due to George Bush’s decision to extend the unemployment benefits beyond a maximum of 26 weeks. At the time, Brad DeLong (correctly) predicted that Bush’s actions would raise the unemployment rate 0.6% by election day, and thus hurt McCain’s chances. (Recall that this was 2008, before liberals stopped believing that incentives affect the behavior of workers and employers.)
After each participant read their statement, most of the debate was over whether the statement should indicate that markets were being monitored “closely” or “carefully.” They opted not to use ‘closely,’ as they feared it would lead people to think the Fed was actually paying close attention to the information conveyed by asset prices. I don’t care which term they use, but I would like to them to pay closer attention to asset prices.
But that wasn’t the only problem in late 2008. In the early part of 2008 the Fed had adopted a Svenssonian “target the forecast” approach, and it actually worked fairly well. Here’s Bernanke:
As President Plosser pointed out, we really shouldn’t argue about the level of the funds rate or the level of the spreads. We should think about the forecast and whether our policy path is consistent with achieving our objectives over the forecast period. I am sympathetic to the general view taken by the staff, which argues that those recession dynamics and financial restraints are important, that we are looking at slow growth going forward, and that inflation is likely to moderate. Based on those assumptions, I think that our policy is looking actually pretty good. To my mind, our quick move early this year, which was obviously very controversial and uncertain, was appropriate. . . . As I said, I think our aggressive approach earlier in the year is looking pretty good, particularly as inflation pressures have seemed to moderate.
For some reason the policy was abandoned in late 2008. The Fed began forecasting a path for aggregate demand that was clearly below their implicit policy goals. They weren’t just ignoring market forecasts; they were ignoring their own forecasts. And they did so even before rates had hit zero. Why?
When I talk to elite economists they tell me that reducing rates to zero a bit earlier would not have helped much. OK, but even so why not do it? And why not also do QE and forward guidance? And why pay interest on reserves? (The rate was significantly higher than 1/4% during November 2008.)
As of September 2008 I’d been basically fine with Fed policy for 25 years. I generally had a “whatever” attitude. Suddenly policy seemed obviously, shockingly, far off course. And no one has been able to explain to me why I was wrong. I’m still waiting for a good explanation for the Fed’s decisions—these transcripts certainly don’t provide one.