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Transcripts reveal Fed misread crisis in ’07

Published: Sat, January 19, 2013 @ 12:00 a.m.

Associated Press


Federal Reserve officials in 2007 underestimated the scope of the approaching financial crisis and how it would tip the U.S. economy into the worst recession since the Great Depression, transcripts of the Fed’s policy meetings that year show.

The meetings occurred as the country was on the brink of the worst financial crisis since the 1930s. As the year went on, Fed officials shifted their focus away from the risk of inflation as they slowly began to recognize the severity of the crisis.

During 2007, the Fed began to cut interest rates and took extraordinary steps to ease credit and shore up confidence in the banking system. Throughout the year, the housing crisis deepened. Banks and hedge funds that had invested big in subprime mortgages were left with worthless assets as foreclosures rose. The damage reached the top echelons of Wall Street.

At the Fed’s Oct. 30 policy meeting, Chairman Ben Bernanke noted that housing was “very weak” and manufacturing was slowing.

“But expect for those sectors, there is a good bit of momentum in the economy,” he said. Bernanke did acknowledge that there was “an unusual amount of uncertainty” surrounding the Fed’s economic forecasts.

“In the aggregate data, there is yet no clear sign of a spillover from housing,” Bernanke said in summing up the views of the committee.

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