In winter, they thought it likely. In spring, they were certain.
In summer, they changed their minds.
And in the fall, they realized not only was the economy contracting, it was in the midst of a crisis of historical proportions.
Here are excerpts from the 2008 transcripts of the Fed’s policy-making committee, released Friday, showing how officials made up and then changed their minds.
Jan. 9, 2008
Economic data — on layoffs, consumer confidence, industrial production and many other indicators — comes in weak at the end of 2007. The Fed’s staff economists warn that a recession is a strong possibility.
CHAIRMAN BEN S. BERNANKE: I think there are a lot of indications that we may soon be in a recession. I think a garden-variety recession is an acceptable risk, but I am also concerned that such a downturn might morph into something more serious. . . . Obviously, ex ante it’s extremely hard to tell, but I do think the risks are at least 50 percent at this point that we will see an N.B.E.R. recession this year.
Jan. 29-30
The Fed believes that a slowdown is happening and a recession is likely. But it predicts that the turmoil will pass quickly — in a matter of months, not years. That said, some officials are much more pessimistic.
JANET L. YELLEN: The severe and prolonged housing downturn and financial shock have put the economy at, if not beyond, the brink of recession.
RICHARD FISHER: While there are tales of woe, none of the 30 C.E.O.’s to whom I talked, outside of housing, see the economy trending into negative territory. They see slower growth. Some of them see much slower growth. None of them at this juncture – the cover of Newsweek notwithstanding, a great contra-indicator, which by the way shows “the road to recession” on the issue that is about to come out – see us going into recession.
CHARLES EVANS: Our cumulative actions following this meeting should provide noticeable stimulus to the economy by midyear.… In the absence of further negative developments, growth should improve in the second half of this year.
ERIC ROSENGREN: We could soon be or may already be in a recession.
March 18
The Fed sharply revises down its forecasts, and determines that the economy is heading toward a recession.
MR. ROSENGREN: While most analysts are in the process of downgrading their forecasts from skirting to actually having a mild recession, the risk of a more severe downturn is uncomfortably high.
April 29-30
Officials broadly agree that the economy is in or near a recession. The question is how deep it will be, and whether a “recessionary dynamic” will take hold – with fear holding households back from spending, making the recession worse.
Fed officials also believe that its steps to stimulate the economy, as well as new policies from Congress, might help to offset or even reverse the decline. Only four regional presidents use the word “recession” to describe the current state of the economy.
MR. EVANS: I’m a little curious as to why [the Fed is not] forecasting a jobless recovery. In the last two recessions, that has been an important element of what followed.
JEFFREY M. LACKER: Will the economy go into a substantially deeper recession than we expect? Or coming out of this recession, will the trailing inflation rate be higher than it was when we went in? Although I hope neither of these occurs, my sense right now is that the chance of an increase in trend inflation is more likely than a much deeper recession.
June 24-25
Some economic data comes in better than expected — leading Fed officials to conclude that there might not be a recession after all. Several officials become more worried about stoking inflation than poor economic growth.
MR. FISHER: If Robert Frost will forgive me, the woods are not lovely, and they are indeed deep and dark on the price front. Although the tail risk of economic recession has diminished, I think it still exists. … But the risk of inflation, in my view, has assumed greater depth and breadth since we last met.
MR. LACKER: Even if we avoid outright recession, as now seems probable, the unemployment rate is likely to keep rising for a time.
MR. BERNANKE: Notwithstanding the stronger-than-expected performance in the second quarter, I think there is an excellent chance that we will still see a recessionary dynamic. … I do not agree that systemic risk has gone away. I think it is in abeyance. There is perhaps, if anything, excessive confidence in the ability of the Fed to prevent a crisis situation from metastasizing.
Aug. 5
Fed officials continue to believe the economy might skirt recession.
JAMES BULLARD: Labor markets have been weak, but I am not as pessimistic as most on this dimension. … I think the labeling game can mislead us in our thinking about the economy. The main contribution that the [Fed] can make to the economy is to keep inflation low and stable.
MR. LACKER: I expect sluggish growth to continue through the remainder of the year, with a pickup beginning sometime next year. Housing is likely to continue to be a drag, though a diminishing one, until then.
Sept. 16
Financial markets are deteriorating rapidly, taking up much of the policy makers’ attention.
ELIZABETH A. DUKE: Some small retail centers are showing softness with the small storefronts, and in areas like Michigan, they’re worried about losing the anchor tenants. Other than that, everything is O.K. The other consumer credit feels like a mild recession but, again, is normally cyclical.
MR. BERNANKE: 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 N.B.E.R. recession.
Oct. 7
Fed officials start to realize the economy is worse than they thought – but how bad?
EVANS: The only thing keeping us from calling this a recession is the official people who are in charge of doing that.
ROBERT H. RASCHE, STANDING IN FOR JAMES BULLARD: There’s still a significant probability that any recession will be quite mild. We have acted pre-emptively, aggressively, and unilaterally since the beginning of the year against the risk of an economic slowdown. We can afford to be patient.
Oct. 28-29
Fed officials concur: It’s bad. It’s very, very bad. They slash their growth forecasts and recognize that the rest of the world is in for a rocky few quarters as well. Things are so bad that Mr. Fisher of the Dallas Fed declines to describe the economic conditions in his district — he wants to talk only about what the Fed should do.
MS. YELLEN: In the run-up to Halloween, we have had a witch’s brew of news. Sorry. The downward trajectory of economic data has been hair-raising. … It is becoming abundantly clear that we are in the midst of a serious global meltdown.
THOMAS M. HOENIG: Down is where we’re going. How much, though, is speculation right now. I don’t know. I don’t know that anyone does until we begin to see things settle out.
CHARLES PLOSSER: We have been lowering the funds rate since January, largely in anticipation of a recession or to mitigate the chances of one occurring. Now, it may finally have arrived. Does that mean we have to lower more?
TIMOTHY F. GEITHNER: I don’t see a good case for monetary policy gradualism in the current context. The risks are too great. If we’re too tentative, the damage to the financial system and to the real economy could be much greater and much harder to correct.
Dec. 15-16
The only question is how bad it will be.
MS. YELLEN: This nasty set of economic linkages is gaining momentum.
MR. BERNANKE: It’s not a moderate recession, and it’s not a normal financial downturn.