Faced with sharply deteriorating
economic conditions in 2011 after ending their second bond-buying program,
Federal Reserve policymakers made an unprecedented bid to shore up the recovery
by promising to keep rates low until at least mid-2013.
But according to transcripts of
the 2011 Fed meetings released for the first time on Thursday, then-Fed vice
Chair Janet Yellen wanted an even stronger statement - a vow to keep rates low
not just until mid-2013, but until the unemployment rate, then at about 9 percent,
fell to 7.5 percent.
Yellen, chair of the U.S. central
bank since 2014, has resisted calls from Republicans in Congress to tie Fed
decision-making on rates to a monetary policy rule that uses data on GDP and
inflation to determine what interest rate the Fed should target.
But at the Fed's August 9, 2011
meeting, she advocated for something along those lines herself -- tying the
Fed's rate-setting to a threshold for the unemployment rate.
The idea was ultimately abandoned
in that meeting, panned by several of her colleagues, including St. Louis Fed
President James Bullard who called the idea "super risky."
But at least two other times in
2011 Yellen embraced controversial steps to ease monetary policy that, like her
unemployment rate threshold idea, were initially rejected but later embraced by
the policy-setting panel as a whole.
In December 2011, for instance,
she proposed extending the Fed's low-rate promise until 2014, which it did the
following month. At the same meeting she also backed further purchases of
mortgage-backed securities -- a plan that was later implemented in September
2012.
Unlike presidents of several
regional Fed banks, though, Yellen never dissented in favor of easing, keeping
the extent of her dovish views under wraps.
Transcripts for Fed
policy-setting meetings are released with a five year lag.
It is likely Yellen will be
replaced when her current term expires in early 2018 by President-elect Donald
Trump, who during his campaign last year accused Yellen of leaving rates low to
aid the Obama administration.
In August 2011, a few
policymakers did raise concerns that a promise to leave rates low until
mid-2013 could be construed as politically motivated. But most Fed officials
were not too concerned about that perception.
Instead the discussion centered
more around worries that the Fed's hands could be tied by a low-rate promise,
although ultimately the majority did support the change. Three dissented.
In early 2011, Yellen, like many
of her fellow policymakers, expressed optimism about household spending and
economic growth, but as the eurozone crisis worsened and U.S. growth slowed,
she made a complete turnaround, calling the case for more easing in August
"compelling."
Chicago Fed President Charles
Evans said he liked Yellen's idea, and even added some language of his own,
suggesting that a rate hike would only be triggered if inflation, at that point
lingering well below 2 percent, rose to 2.5 percent.
In the end, policymakers went
with the mid-2013 low-rate vow, which was, then Fed Chair Ben Bernanke said,
"the most modest possible step we could take" in light of the
worsening outlook. The following month they embarked on a limited bond-buying
program known as Operation Twist designed to boost the economy further.
The Fed ultimately kept rates
where they were, only just above zero, until December 2015, when the central
bank hiked interest rates for the first time in nearly a decade by a quarter
percentage point.
A month after the August 2011 Fed
meeting, Evans went public with the idea of using an unemployment rate
threshold as a guideline for monetary policy, and for the next year or so made
speech after speech making the case for the approach.
Many months later, Yellen
publicly backed what by then was known as the Evans rule, never letting on that
it was she who first suggested it.
In December 2012, the Fed tied
its low-rate vow to the unemployment rate for the first time, a promise it
would repeat for the ensuing 12 months.
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