- Predicted $1 trillion in QE as FOMC approved $600 billion
- Saw risk of `Japan-style deflation,' meeting transcripts show
Federal Reserve Chair Janet Yellen voiced concern in 2010 that the nascent U.S. recovery was shaky and told colleagues they would have to do more stimulus beyond the second round of asset purchases -- a forecast that later proved prescient.
“We should and will end up purchasing roughly $1 trillion of longer-term securities,” Yellen said at the November 2010 Federal Open Market Committee meeting, according to transcripts released Friday in Washington. She said the $600 billion the Fed was committing to was “a sufficient step for today.” Yellen was president of the San Francisco Fed that year until October, when she became Fed vice chair.
Yellen’s previously unreported remarks in 2010 may offer new clues on her approach to raising interest rates this year, with the Fed trying to take stock of a U.S. labor market near full employment, inflation below the central bank’s goal and weak economies around the world.
The transcripts from FOMC meetings in 2010 detail Yellen’s behind-the-scenes approach to policy during a pivotal time for the Fed, as Chairman Ben S. Bernanke and colleagues attempted to nurture a rebound from the worst economic downturn since the Great Depression. While they contemplated an exit strategy from stimulus at the start of the year, the recovery would prove disappointingly elusive, leading officials to start a second round of large-scale asset purchases aimed at boosting expansion.
The Fed in 1995 began its policy of releasing verbatim discussions with a five-year lag under pressure from Henry Gonzalez, the Democratic chairman of the House Banking Committee in the early 1990s.
Yellen, now 69, said at the April meeting that she was “heartened” by recent data showing a stronger economy. By June, her outlook had soured somewhat after a European debt crisis flared.
“I still ascribe to the view that the economy is on a recovery path of moderate growth and very low inflation, but significant downside risks to the outlook have once again materialized and that implies that we should avoid altering policy in any way that could impede a fragile recovery,” Yellen said at the June FOMC meeting.
By August she was calling the economic outlook “unusually uncertain,” as the Fed approved reinvesting principal payments from holdings into longer-term Treasuries, a policy still in place today. She said she was concerned about falling inflation and said that while “a further disinflation seems unlikely,” the possibility of “a Japan-style deflation remains a relevant worst-case scenario for us going forward.”
In November, policy makers restarted mass bond buying. Officials said in that month’s statement that progress toward the committee’s objectives had been “disappointingly slow.” The FOMC said it intended to buy $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.
Yellen’s prediction of further stimulus would turn out to be too conservative. The Fed in September 2012 approved using $85 billion a month to purchase Treasuries and mortgage-backed securities, with no scheduled end. Purchases were tapered gradually before ceasing in October 2014, after about $1.7 trillion was added to the Fed’s already bloated balance sheet. It remains now at about $4.5 trillion.
Yellen also proved right about inflation in 2010, as she worried repeatedly about weak price pressures even as some colleagues felt risks of inflation were rising.
“With various measures of utilization still showing significant margins of slack, I expect the downward trend in inflation to continue,” she said at the March meeting.
The Fed’s preferred measure of inflation hit 2.2 percent in January 2010, slowing to 1.2 percent in November of that year.
Yellen wasn’t perfect in her projections. In April, she told the FOMC she expected the economy to grow about 3.5 percent that year and by 4.5 percent in 2011. U.S. gross domestic product expanded only 2.5 percent in 2010 and 1.6 percent in 2011.
Although the debate in the first half of 2010 over how and when to tighten monetary policy proved premature, it did reveal Yellen’s clear preference for raising interest rates before reducing the size of the balance sheet.
“I’m not at all convinced that the size of our balance sheet creates unacceptable inflation risks through an impact on inflation expectations,” she said in April 2010.
In June, she added: “I think it is a sound decision to sell assets, but to do so only after we’ve made a decision to tighten monetary policy, and to start that off with an increase in our target for a short-term interest rate.”
Yellen, as chair, followed her own advice on moving first with interest rates in December 2015, and has backed an even more careful approach to the balance sheet. The Fed has said it has no plans to sell assets but will eventually reduce holdings by halting the reinvestment of principal payments from matured bonds.