WASHINGTON — Transcripts released Friday show sharp divisions inside the Federal Reserve in 2012 over the need for a third round of bond purchases to boost a lagging economy.
The doubters, including the presumed incoming Fed chair Jerome Powell, expressed fears that the risks outweighed what they believed would be small benefits. Even then-Fed Chairman Ben Bernanke, who was pushing for the move, conceded that whatever action the Fed took was “going to be a shot in the proverbial dark.”
After extensive debate over two days, the central bank ended up supporting Bernanke by voting to launch the new effort to bolster the economy by buying $40 billion monthly in mortgage-backed securities to push long-term borrowing costs down.
The discussion was revealed in full transcripts of the Fed’s eight meetings in 2012, released after the customary five-year delay.
The transcripts showed a central bank struggling to come to grips with an economy still trying to gain momentum after the 2008 financial crisis which had pushed the country into the deepest recession since the 1930s.
All officials agreed that the economy was weak, but they differed sharply over what the Fed should do. One group argued that after two rounds of bond purchases totaling over $2 trillion, it was not likely that a third round would do much good. The Fed was buying bonds as a way to lower long-term interest rates and spur borrowing by businesses on new equipment and consumers on such items as homes.
Janet Yellen, then the Fed’s vice chairman who would succeed Bernanke, was a strong supporter of the new round of bond purchases. New board member Jerome Powell, who joined the Fed in May 2012, was less enthusiastic. Powell has been nominated by Trump to succeed Yellen as Fed chairman next month.
“My concern is that for very modest benefits, we are piling up risks for the future,” Powell said.
Several presidents of the Fed’s regional banks argued against new bond purchases, saying that they could trigger higher inflation down the road and create dangerous asset bubbles in such areas as stock prices.
Among the other details revealed in the discussions:
—Yellen warned that without further Fed help, the economy could be facing a “lost decade” of high unemployment from a “painfully slow recovery.”
—Bernanke argued that the risks of doing nothing, given the economy’s weakness, were greater than providing more support. He urged his colleages “despite their disagreements to present a united front” in support of the Fed’s actions.
—The Fed voted 11-1 in the end to launch the new bond purchases with Bernanke helped by the fact that many of the regional bank presidents who spoke against the action did not have a vote in 2012.
—The worries that an extended period of low interest rate policies could trigger inflation or financial market instability have yet to materialize, although Fed critics contend that the central bank may set off market turmoil as it tries to unwind its massive bond holdings.
The Fed followed up the September decision with a move in December to buy $45 billion a month in Treasury bonds. That brought total purchases to $85 billion per month and made the program open-ended until the economy showed improvement.
The efforts pushed the Fed’s balance sheet up to $4.5 trillion. It was only in October 2017 that the central bank began gradually trimming its holdings.
The Fed also debated throughout 2012 how to tweak its forward guidance to provide assurance to markets that rates would remain low for an extended period. At the final meeting of the year, it changed the wording to say it would not begin raising interest rates until the unemployment rate, then at 7.7 percent, had fallen to at least 6.5 percent.
The Fed kept rates at a record low near zero for three more years until December 2015 when it nudged its benchmark rate up by a quarter-point. It also raised rates once in 2016 and then three times in 2017, pushing its policy rate to a range of 1.25 percent to 1.5 percent.