Janet Yellen saw the U.S. economy “at, if not beyond, the brink of recession” in January 2008, differing from the less gloomy view of Federal Reserve staff, according to transcripts of policy meetings released today.
Yellen, president of the San Francisco Fed at the time and now central bank chair, spoke at the January meeting after the Fed staff reported that the economy wasn’t in a recession, though the likelihood of a downturn was increasing.
Yellen said deteriorating credit conditions and a slowdown in the labor market were likely to weigh on economic growth.
“Delinquencies and charge-offs on most forms of consumer debt have already risen, and slower job growth seems likely to exacerbate this trend, prompting financial institutions to further tighten credit standards and terms,” she said at the Jan. 29-30, 2008, meeting of the Federal Open Market Committee. “In my forecast, such developments reverberate back negatively onto economic activity.”
As the FOMC met, the U.S. economy had already been in a recession for almost two months. The 18-month recession began in December 2007, according to the National Bureau of Economic Research.
The previous week, the FOMC had cut its main interest rate by three quarters of a percentage point in its first emergency reduction since 2001. The FOMC on Jan. 22, 2008, reduced the target overnight lending rate to 3.5 percent from 4.25 percent, the biggest single reduction since the Fed began using the rate as the principal tool of monetary policy around 1990.
In FOMC discussion before the emergency reduction, Yellen said “the outlook has deteriorated” and “I think the risk of a severe recession and credit crisis is unacceptably high.”
At the Jan. 29-30 meeting, the Fed again cut its benchmark interest rate, this time by half a point to 3 percent, and indicated a willingness to do so again to prevent a recession.
“Downside risks to growth remain,” the FOMC said in a statement. In a reference to the volatility of the previous five months, the Fed said “financial markets remain under considerable stress and credit has tightened further for some businesses and households.”
Fed Chairman Ben S. Bernanke called for “forceful” action at that meeting, saying there was “no evidence whatsoever that the housing market is stabilizing.”
“So long as house prices keep falling, we cannot rule out some extremely serious downside risks to our economy and to our financial system,” Bernanke said. “We need to be proactive and forceful, not tentative and indecisive, in addressing this risk.”
The FOMC acted Jan. 30 after hearing a report from David Reifschneider, associate director of the Fed’s division of research and statistics, that “as you know, we are not forecasting a recession.”
“While the model estimates of the probability of recession have moved up, they are not uniform in their assessment that a recession is at hand,” he said. “Another argument against forecasting recession is that, with the notable exception of housing, we see few signs of a significant inventory overhang.”
Yellen said at the meeting that she “broadly” agreed with the staff’s forecast that the economy would grow in 2008 and that there were “considerable” downside risks to that forecast.
Still, she said, “the severe and prolonged housing downturn and financial shock have put the economy at, if not beyond, the brink of recession.”