Transcripts show Fed divided in 2011 over bond purchases

WASHINGTON — Newly released transcripts show Federal Reserve officials were sharply divided in 2011 over whether the central bank should launch a program aimed at pushing long-term interest rates lower to spur economic growth.

The transcripts released Thursday show that some officials worried the effort could lead to inflation risks. Others argued that the bigger danger was that the country could topple into a new recession.

The central bank ended up adopting the program, dubbed "Operation Twist," at its September 2011 meeting by a 7-3 vote after what the transcripts showed was a lengthy and at times contentious debate. Under the program, the Fed sold $400 billion in short-term U.S. government debt and used the money to buy longer-term debt as a way to lower long-term rates and spark economic growth.

The 2011 transcripts, released with the usual five-year delay, showed a central bank still struggling to come to grips with the aftermath of the worst recession since the Great Depression of the 1930s.

In urging the action, Janet Yellen, now the Fed chair but then the vice chair, argued, "I've become increasingly concerned that the economy is near stall speed and could easily slip into recession."

However, other Fed officials worried that inflation had started to rise, and that increasing fuel for the economy could end up causing inflation problems in the future.

Some officials also questioned whether the new program would have much impact.

"Right now we have little left in our holster," said Richard Fisher, then president of the Fed's Dallas regional bank. "We are shooting BBs, not bullets." Fisher argued that a better approach than deploying the new program would be to develop strategies for what the Fed might need to do if more "dire circumstances" were to prevail.

Among those possibilities, Fisher cited the "debacle that might ensue in Europe," which was struggling to contain a debt crisis triggered by problems in Greece.

Charles Plosser, then president of the Fed's Philadelphia regional bank, expressed concerns about the rise in inflation.

"We seriously have to ask ourselves as a committee whether or not our incessant efforts to 'fix the economy' — to little or no effect recently — is reassuring or actually lowering confidence," he told his colleagues.

Fisher, Plosser and Narayana Kocherlakota, then president of the Fed's Minneapolis regional bank, all voted against the new bond buying. The same three officials had dissented at the Fed's previous meeting in August. It marked the first time there had been as many as three dissents at a Fed meeting in nearly two decades.

In August, the three officials had all objected to changing the wording of the Fed's statement from saying the central bank expected to keep its key policy rate, then at a record low near zero, at an exceptionally low level "for an extended period of time." That phrase was changed in August to an expectation that rates would remain exceptionally low "at least through mid-2013."

When then-Fed Chairman Ben Bernanke realized that three officials planned to dissent because of that wording change, he said, according to the transcript of the August meeting, "It would be very unpleasant to have three dissents, but I guess if that's where we end up, that's where we end up."

As it turned out, financial markets ended up viewing the three dissents not as a signal that Bernanke was losing control of the Fed committee but as a sign of his determination to pursue low interest rates for as long as necessary to help the economy recover.

Even though the 2007-2009 downturn ended in mid-2009, growth was slow and millions of people who had lost their jobs remained out of work. At the beginning of 2011, the unemployment rate stood at 9.1 percent, only a slight improvement from the high-point during of 10 percent hit in late 2009.

In addition to a worsening debt crisis in Europe, the global economy had been jolted by a severe earthquake and tsunami in Japan in March of 2011, which disrupted global supply chains.

The transcripts covered the Fed's eight regular meetings in 2011 and two emergency telephone conference calls. One call on Aug. 1 was to discuss the Fed's preparations to handle a failure by Congress to boost the government's borrowing limit. Congress raised the debt limit right before the deadline.

In the second call on Nov. 28, Bernanke got approval from the Fed's policy group to extend swap lines to foreign central banks to provide emergency loans if needed during renewed turbulence caused by the European debt crisis.

The Fed in December 2008 had cut its target for a key interest rate, the federal funds rate, to a record low near zero. With no ability to lower the rate further, the Fed in late 2008 began buying long-term Treasury bonds and mortgage-backed securities as a way to push long-term interest rates lower and provide a further boost to the economy.

However, these rounds of bond purchases, labeled quantitative easing, had drawn criticism from Republicans in Congress, who believed they were raising inflation threats and possibly creating potentially dangerous asset bubbles in such areas as stock prices.

Then-Texas Gov. Rick Perry, the front-runner at the time in polls for the GOP presidential nomination in 2012, had said that Bernanke would be "almost treasonous" if he launched more bond buying.

The "Operation Twist" program the Fed approved in September 2011 would run through the end of 2012 and be replaced by a third and final round of bond purchases that began in late 2012. The Fed would not begin raising its short-term interest rates until December 2015 when it boosted the rate by a modest quarter-point. That was followed by a second quarter-point increase last month.