Federal Reserve officials struggled with leaks and divisive arguments in 2010 as the central bank responded to a flailing economy with the “QE2” stimulus program, newly released transcripts from that year’s meetings show.
Chairman Ben Bernanke had to dedicate part of one meeting to discussing cracking down on unauthorized communications and later had to appeal to members of the Fed’s monetary policy committee to “pull down the heat” on their disagreements.
The year 2010 was difficult for the Fed, with the unemployment rate still soaring above 9 percent as the economy struggled to gain momentum in recovering from the financial crisis. Members of the Fed had major disagreements about how to respond, with the Fed’s leaders favoring a controversial new bond-buying program, now known as QE2, and other members worried that such a stimulus effort could lead to inflation or other problems. Transcripts from the year’s monetary policy meetings released Friday morning shed light on the tensions.
To start the November 2010 meeting, Bernanke called attention to three problems: There were too many leaks about the Fed’s monetary policy deliberations, outsiders were trading off claimed special access or knowledge of the Fed’s decision-making, and members of the Fed were publicly staking out firm positions for or against certain decisions before meetings took place.
In a conference call in October in which he told Fed officials that they would discuss the communications problems, Bernanke implored members not to express definitive points of view before the meetings even started. “If everybody has already made up their mind before the meeting, why don’t we just phone in the votes and save ourselves the travel?” he asked.
Janet Yellen, then the Fed’s vice chairwoman, echoed Bernanke’s concerns at the November meeting, the same meeting at which the Fed would start QE2. “We’ve come in for a lot of criticism of our external communications — we’re getting low grades, and they’re not entirely undeserved,” she said. “I personally see them as damaging our credibility and our reputation at a time when the institution is under enormous scrutiny, and we can ill afford it.”
Yellen, who would later head a new committee tasked with improving the Fed’s communications, warned that Fed officials’ public disagreements were harming the economy.
“Many of the comments we’ve made are destructive of collegiality and of the committee process,” she warned. She later added that “it does more than undermine collegiality. I think we’ve been generating a great deal of noise and market volatility.”
Yellen also advised other members that it was easy to get tripped up by “experienced reporters” who could “lure” them into revealing more than they should.
Richard Fisher, then the president of the Federal Reserve Bank of Dallas, singled out one such reporter, the Wall Street Journal’s David Wessel. Wessel’s recently published book was a “disaster,” Fisher said, containing way too much non-public information.
Fisher warned the committee that loose communications could amount to the equivalent of “insider trading.” He told the committee about a former Fed official who was boasting of his access to the Fed’s monetary policy decisions, calling himself the “19th member” of the committee. “He makes money off of us when he talks and sells,” Fisher said, suggesting that new legal remedies may be called for.
As it happens, the Fed would continue to struggle with leaks. One 2012 leak, and the Fed’s response, remains the subject of a federal investigation.
The tensions were not improved after QE2 was started. At the Fed’s December meeting, Bernanke said the “main thing we can do that would be constructive, as far as I’m concerned, is to pull down the heat a little bit.”
“You know, I’m not asking for any real changes,” he told members. “Let’s just keep the heat down and give this policy some chance to work or not to work.”
At the time, the Fed was facing significant pressure from Congress and the public, who were skeptical about the central bank’s stimulus efforts.
At the December meeting, Minneapolis Fed President Narayana Kocherlakota drew attention to one critic in particular: Former GOP vice presidential candidate Sarah Palin.
The success of the Fed’s quantitative easing program, Kocherlakota said, depended partly on how it was perceived by the public, leaving the Fed “at the mercy of outside influences.”
“Indeed, even tweets from former governors of Alaska can end up affecting those expectations,” he said to laughter, referring to a social media broadside from Palin against the stimulus program.
