We’re starting to see our first glimpse into the Federal Reserve’s thinking during the 2008 Economic Apocalypse with the release of the 2008 transcripts. It shows a definite lag time in comprehension despite overwhelming data that showed impending doom was already upon the world.
To be honest, with the benefit of hindsight, I don’t think the Federal Reserve could have done anything to stop the financial meteor from hitting the Earth. What they didn’t need to do however, was pour gasoline on the ensuing fires by maintaining high interest rates, which is supposed to “encourage” people to save money. What’s noticeably missing from the data (PDF) are unemployment data. Unemployment had already spiked by the September FOMC meeting and was still climbing:
Then came the Inflationistas: those who complained that pumping money into the economy would increase inflation – which never happened. In Chairman Bernanke’s September Press release, he cites current rises in inflation with the decision to keep interest rates at 2%. Except there was no actual inflation – in fact, there was Deflation – something that should’ve given every Economist a moment of pause.
The Consumer Price Index was down a full percentage point by the September meeting. CPI would deflate another 2% after the meeting. Deflation in a contracting economy is indeed Economic Armageddon. It leads to currency devaluation, which leads to needing wheelbarrows full of cash to buy a loaf of bread. Thankfully, the CPI stabilized by 2009.
Of course, by December 2008, the FOMC was in a full-fledged kiniption (PDF), which would cause them to force the economy into a liquidity trap, from which the American economy still hasn’t gotten out of.
It’s a different economic landscape in the post-apocalyptic world. Hopefully the Board of Governors has cut down on the lag time. One can always hope – especially with a new Fed Chair.
A full index of the Federal Reserve’s transcripts can be found here.