Inside the Fed’s 2007 crisis response

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Posted by The Washington Post Economics Team on January 18, 2013 at 10:02 am

Friday morning, the Federal Reserve published transcripts of its closed-door policy meetings in 2007, the first year of a financial crisis that remade the global economy, and a year in which the United States fell into what would become the deepest recession of modern times. It was also the year in which the Fed’s began an era of unprecedented activism, in its efforts to keep the global financial system from unraveling.

The transcripts of eight regular meetings of the Federal Open Market Committee and three emergency videoconference calls that year, released with a customary five year delay, paint a portrait of policymakers trying to grapple with a rapidly spreading crisis. After months in which markets lost confidence in securities backed by subprime mortgages–and, as time went on, the banks that owned those securities–an all-out financial panic began in August, 2007. The Fed made its first policy change by cutting the “discount rate,” an emergency bank lending rate, in an emergency videoconference on August 16. It then followed up by cutting short-term interest rates in September, October, and December meetings. And in December, it also launched the first of its unconventional programs to backstop the world banking system, giving foreign central banks access to Fed dollars.

As recession began, optimism and Twinkies
In December 2007, the month that the recession is now known to have begun, Fed officials were working from economic projections that would prove wildly inaccurate. They forecast sluggish but sustained growth in 2008 followed by a bounceback in 2009. Staff economist Dave Stockton acknowledged that his was a more optimistic view:
“Our forecast could admittedly be read as still painting a pretty benign
picture: Despite all the financial turmoil, the economy avoids recession and, even with steeply higher prices for food and energy and a lower exchange value of the dollar, we achieve some modest edging-off of inflation.”

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http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/18/breaking-inside-the-feds-2007-crisis-response/