The stakes rose for the Federal Reserve in 2007. Over the course of the year, Chairman Ben Bernanke and his colleagues would grapple with a financial crisis that would build into a global conflagration, sending the United States into a deep recession. Fed officials were at odds over the scale of the threat and how to respond to it, though by December they moved toward a consensus for stronger action.
Transcripts from the central bank’s policy meetings, released with the customary five-year lag on Friday, reveal a panel struggling to get a handle on the dramatic financial events that were unfolding before their eyes. The Fed’s policy arm, the Federal Open Market Committee, has 19 members that weigh in at regular meetings, with votes on policy rotating among 12.
Some of the 2007 forecasts missed the mark. “I think the odds are that the market will stabilize,” Bernanke said on Aug. 7.
Others were eerily prescient. “In terms of risks to the outlook for growth, I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector. The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst,” then-San Francisco Fed President Janet Yellen said in June. Ultimately, the National Bureau of Economic Research would declare that the recession—the worst downturn since the Great Depression—officially began in the fourth quarter of 2007.
But transcripts released from the bank’s policy-setting committee meetings that year reveal that despite those disagreements, the meeting dynamics remained collegial. Indeed, Frederic Mishkin, who was then serving as one of the Fed’s governors, compared the Fed’s policy discussions to faculty gatherings.
“There’s even inertia in general, just in that we have nineteen participants at a table. As an academic, I mentioned to [then-governor] Don Kohn at one point that sometimes I think these meetings have elements of faculty meetings, and that is not always something that you enjoy,” he said to laughter. “Some of you guys may not have experienced that, but it’s a lot of fun.”
TWEED COATS AND CORDUROY SUITS
Mishkin, like Bernanke, came to the Fed from academia; he had taught at Columbia University’s Graduate School of Business. Bernanke chaired the economic department at Princeton University before joining the Fed as a governor, and joked in 2005 that he “had responsibility for major policy decisions such as whether to serve bagels or donuts at the department coffee hour.”
“There is criticism that we are too academic here because some of us have worn tweed coats,” Mishkin joked at the committee’s August meeting. “So that you know, the Chairman used to come to the New York Fed meetings and would wear those patches on the outside of his coat. I actually like that look and have my assistant professor corduroy suit.”
(Bernanke, for what it’s worth, has said that he preferred the relaxed dress code of academia to the staid Washington one. “The biggest downside of my current job is that I have to wear a suit to work,” he said. “Wearing uncomfortable clothes on purpose is an example of what former Princeton hockey player and Nobel Prize winner Michael Spence taught economists to call 'signaling.' You have to do it to show that you take your official responsibilities seriously. My proposal that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded.”)
On the matter of collegiality, it’s a point of pride for the Fed that its staff gets along. An informational brochure for those interested in working at the Board of Governors describes a “pleasant, collegial atmosphere” as “a major plus.”
So despite their disagreements, members of the FOMC poked fun at each other as they hashed out the best response to the unfolding crisis. Welcoming new Boston Fed President Eric Rosengren to the committee, Bernanke said, “I have known Eric for about twenty years. We used to be squash partners. I won’t say who won. We know who wins now.”
The number of instances of “laughter” in the transcripts peaked in the summer of 2007 before declining at the end of the year (for the sake of comparison, the chart below doubled the notations of “laughter” in transcripts of single-day meetings so they could be more fairly compared against two-day meetings)—even those lighter moments of the summer had dropped off in the fall as the hints of crisis became more apparent.
Some of the humor was dark, and appears more so in hindsight. David Stockton, a Fed economist, joked in December that the bank’s forecast—which was “pretty benign” and predicted avoiding recession—was reached without the influence of “mind-altering chemicals.”
“No, we came up with this projection unimpaired and on nothing stronger than many late nights of diet Pepsi and vending-machine Twinkies,” said Stockton.
The Federal Open Market Committee met eight times in 2007 and held three conference calls, the records of which are available here.