Faced with sharply deteriorating economic conditions in 2011 after ending their second bond-buying program, Federal Reserve policymakers made an unprecedented bid to shore up the recovery by promising to keep rates low until at least mid-2013.
But according to transcripts of the 2011 Fed meetings released for the first time on Thursday, then-Fed vice Chair Janet Yellen wanted an even stronger statement – a vow to keep rates low not just until mid-2013, but until the unemployment rate, then at about 9 percent, fell to 7.5 percent.
Yellen, chair of the U.S. central bank since 2014, has resisted calls from Republicans in Congress to tie Fed decisionmaking on rates to a monetary policy rule that uses data on GDP and inflation to determine what interest rate the Fed should target.
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But at the Fed’s August 9, 2011 meeting, she advocated for something along those lines herself — tying the Fed’s policy-making decisions to a threshold for the unemployment rate.
The idea was ultimately abandoned in that meeting, panned by several of her colleagues, including St. Louis Fed President James Bullard who called the idea “super risky.”
Transcripts for Fed policy-setting meetings are released with a five year lag.
It is likely Yellen will be replaced when her current term expires in early 2018 by President-elect Donald Trump, who during his campaign last year accused Yellen of leaving rates low to aid the Obama administration.
In August 2011, a few policymakers did raise concerns that a promise to leave rates low until mid-2013 could be construed as politically motivated. But most Fed officials were not too concerned about that perception.
Instead the discussion centered more around worries that the Fed’s hands could be tied by a low-rate promise, although ultimately the majority did support the change. Three dissented.
In early 2011, Yellen, like many of her fellow policymakers, expressed optimism about household spending and economic growth, but as the eurozone crisis worsened and U.S. growth slowed, she made a complete turnaround, calling the case for more easing in August “compelling.”
Chicago Fed President Charles Evans said he liked Yellen’s idea, and even added some language of his own, suggesting that a rate hike would only be triggered if inflation, at that point lingering well below 2 percent, rose to 2.5 percent.
In the end, policymakers went with the mid-2013 low-rate vow, which was, then Fed Chair Ben Bernanke said, “the most modest possible step we could take” in light of the worsening outlook. They did not include any reference to the unemployment rate.
But the Fed ultimately kept rates where they were, only just above zero, until December 2015, when the central bank hiked interest rates for the first time in nearly a decade by a quarter percentage point.
A month after the August 2011 Fed meeting, Evans went public with the idea of using an unemployment rate threshold as a guideline for monetary policy, and for the next year or so made speech after speech making the case for the approach.
Many months later, Yellen publicly backed what by then was known as the Evans rule, never letting on that it was she who first suggested it.
In December 2012, the Fed used the threshold language for the first time.