WASHINGTON — The Federal Reserve on Wednesday released transcripts of its board meetings held during the depths of the financial crisis in 2009, revealing that urgent concerns about the weakness of the economy and major financial institutions overcame misgivings about taking a series of unprecedented steps.

In a Jan. 16 conference call and a Jan. 27 meeting, Janet Yellen, then a regional Fed president and now chairman, brushed aside concerns about whether the central bank’s extraordinary actions – such as cutting interest rates and rescuing banks – would ignite inflation or treat certain sectors of the economy unequally.

“The main communication problem we now face is that most of us anticipate a period that may be quite extended in which inflation will be below the mandate-consistent rate, even with monetary policy pulling out all the stops,” Yellen said.

In a debate about whether the Fed should publicly set an inflation target, Yellen said, “We do need to communicate very clearly that such a decline in inflation is both unwelcome and undesirable and that we will do everything possible to return inflation over time toward higher levels consistent with the dual mandate.”

Throughout the year, Yellen remained pessimistic about the economy and advocated aggressive Fed actions.

“My fear is that we may not even get a modest U-shaped recovery, much less a V-shaped one,” she said at the March 18 meeting. “Another disturbing sign of how tough things are getting is that people appear to be breaking into their piggy banks to make ends meet.” She said the Fed’s Cash Product Office reported a huge influx of coins, with December inventories of quarters and dollar coins up more than 50 percent from 2007. Even pennies were up nearly 25 percent.

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“In past recessions, the Fed has been able to fuel a turnaround rapidly by stepping on the accelerator through sharp rate cuts,” Yellen added.

“But in the current crisis, it feels more like we are desperately trying to power a bicycle uphill …”

rather than pressing an accelerator on a high-powered sports car.” She said that, given the severe credit crisis, the Fed had been “treading water” over the previous year.

Some members of the Federal Reserve board worried about the purchase of mortgage-backed securities and whether the Fed was making decisions about which sectors deserved help.

But Yellen said such action was warranted.

“I am very concerned that the underlying economics is now deteriorating largely because of the economy,” she said. “A lot of banks in this area are very loath to lend. The commercial-mortgage-backed securities market seems to be completely dead. I am really very concerned that, without the ability to refinance these loans, we are going to have properties dumped on the market and we will begin to see exactly the same thing happen with commercial real estate that we are seeing with housing. It could lead to a further wave of unnecessary bank failures.”

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The Jan. 16 Fed meeting took place just after the Treasury Department, the Fed and the Federal Deposit Insurance Corporation jointly announced that they would provide support to tottering Bank of America to contribute to financial market stability. The support included a package of guarantees, liquidity access and capital. The inauguration of President Barack Obama was still four days away.

The Fed governors had a brief discussion about whether certain banks were “too big to fail,” but then-Fed chairman Ben Bernanke said, “It is very important, but we can’t address it simultaneously with addressing the near-term threats to the system.”

Pressed by Jeffrey Lacker, president of the Richmond Fed, about the aggressive bailout, Bernanke said, “I am certainly very uncomfortable with it. But for whatever reason, our system is not working the way it should in order to address the crisis in a quick and timely way. Until the reinforcements arrive, I don’t think we have much choice but to try to work with other parts of the government to prevent a financial meltdown.”

The unprecedented nature of the financial crisis and the timing of it at the hand-over from one president to another threw many traditional notions of the Fed’s role out the window.

Some Fed governors were worried about whether its unprecedented intervention in Treasury markets would drive up interest rates. Six years later, with interest rates still at historic lows, the answer seems obvious. But at the Jan. 27 meeting, the worried president of the St. Louis Fed, James Bullard, asked David Stockton, then a Fed economist, what he expected.

Stockton said that, assuming a $1.8 trillion federal budget deficit and a sharp drop in other borrowing, traditional models didn’t apply.

Lacker also told his colleagues that it would be better if the Treasury took measures to prop up the economy because Fed action would end up “distorting relative credit risks across markets.”

But William Dudley, then-vice chairman of the Fed, said, “We are starting with markets that are very out of joint relative to where they have been historically. So to say that you are distorting markets by the intervention, in fact we are actually trying to push markets back to something closer toward normality.”


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