Federal Reserve officials began the year with a heated debate over how to unwind the central bank’s unprecedented support for the U.S. economy, even as the rapidly deteriorating international outlook raised questions about the strength of the global recovery.
Sound like a familiar story? It should, because the year in question was actually 2010, not 2016. The country at that time appeared to be clawing back after the worst downturn since the Great Depression, with economic growth clocking in at 3.9 percent at the end of 2009. That gave officials hope that the United States would be insulated from mounting fears that Greece, Spain and Portugal would be unable to pay their debts and spark another financial crisis throughout Europe.
Speed forward six years, and the dynamics at play in early 2010 mirror the pressures weighing on the Fed now. The central bank finally raised interest rates at the end of last year for the first time since the Great Recession, turning the hypothetical debate over its exit plans in 2010 into real-world policy arguments. Once again, global turmoil threatens to derail the U.S. expansion, although the major threat this time comes from China rather than Europe.
Transcripts of the Fed’s meetings in 2010, released Friday, shed new light on the evolution inside the central bank as officials realized that the country was in for a long slog of a recovery — and came to grips with how much more work they had to do. In 2016, the volatility in global financial markets underscores the risk that history could repeat itself.
By early 2010, the Fed had ended many of the emergency programs launched during the darkest days of the financial crisis. Unemployment was still high but had come down from its peak of 10 percent. Inflation was low despite worries that the stimulus injected by the Fed would cause prices to rise.
The central bank had already provided a historic amount of support for the economy. The Fed’s final injection of quantitative easing — purchases of long-term securities — was in March 2010. Discussing the end of central bank stimulus was a logical next step. What officials did not realize was that it was only the end of the first round.
In its March meeting, the Fed debated and rejected the idea of pumping more money into the economy. Some officials argued for taking away the assurance that the central bank’s benchmark rate, which was slashed to zero in 2008, would remain there.
“We will need to prepare the markets for the eventual start of our exit from this period of extraordinary policy accommodation,” then-Philadelphia Fed President Charles Plosser said.
Others were less confident about the outlook for the U.S. economy — including current Fed Chair Janet L. Yellen — but stopped short of arguing for the Fed to do more.
“Given the extraordinary depth of the recession, I expect it will be a very long time before the economy returns to its potential, and my own economic growth forecast exceeds the pace my business contacts consider plausible in light of the pervasive caution about spending that they see among their customers and business associates,” she said in March.
The tide began to turn over the summer, however, as the crisis in Europe intensified. In unscheduled conference calls, the Fed’s top brass approved emergency swap lines with its counterparts on the Continent to backstop the global financial system. The U.S. economy, meanwhile, was slowing down.
“The disappointing news this summer — lackluster employment, deteriorating sentiment, anemic retail sales, decelerating investment, and further price disinflation — has pushed the attainment of our policy objectives off even further into the future,” Yellen said at the Fed’s meeting in September. “The long slog we had been expecting in the spring now looks even longer and more painful.”
By the end of the year, a majority of Fed policymakers were ready to take action. In an 11-to-1 vote after their November meeting, they approved a second round of stimulus totaling $600 billion, which became known as QE2.
“We’re now facing a recovery that has slowed and does not seem to have the momentum that we were hoping for earlier in the year,” Chair Ben S. Bernanke said at the meeting.
The Fed did not reach consensus easily, and the transcripts released Friday illuminate how deeply controversial the decision was. The problem was not just the stimulus itself, but that it seemed to mark a pivot within the Fed from doing less to doing more. Indeed, the $600 billion effort was already a compromise from the $1.5 trillion stimulus that Bernanke felt would be required to get the recovery back on track but that he knew would not win support from his colleagues.
“The path that you’re leading us to, Mr. Chairman, is not my preferred path forward,” then-Fed governor Kevin Warsh said at the meeting. “I think we are removing much of the burden from those that could actually help reach these objectives, particular the growth and employment objectives, and we are putting that onus strangely on ourselves rather than letting it rest where it should lie.”