"I think there are a lot of indications that we may soon be in a recession," former Federal Reserve Chairman Ben Bernanke told his colleagues in January 2008, not knowing then that the deepest recession since the Great Depression was already well underway.
It wasn't until after Lehman Brothers collapsed in mid-September that Bernanke said he was absolutely sure the U.S. had entered a recession.
On Friday morning, the Federal Reserve released more than 1,500 pages featuring word-for-word transcripts from its 14 policy-making meetings and conference calls in 2008. This was a critical year in which the Fed decided to slash its interest rates to near zero and launch an unprecedented bond-buying program, all in an attempt to stimulate the U.S. economy.
But leading up to those decisions, Federal Reserve officials seemed uncertain about their economic outlook and their actions. The transcripts show they focused heavily on fears about inflation and instability in financial markets, while mentions of unemployment are few and far between. To be fair, the data then did not yet point to the full-blown jobs crisis that has since followed.
Meeting just a day after Lehman Brothers filed for bankruptcy in September 2008, they couldn't agree on whether their decision to allow the investment bank to fail was the right move.
"I think it's too soon to know whether what we did with Lehman is right," said Boston Fed President Eric Rosengren. "I think we did the right thing given the constraints that we had. I hope we get through this week."
Stocks had just had their worst day in seven years, with the Dow falling more than 500 points in one trading session, and AIG was on the brink of a collapse. Yet despite their concerns about market stability, Fed officials decided to hold off on lowering their key interest rate at that September meeting.
"Overall I believe that our current funds rate setting is appropriate, and I don't really see any reason to change," Bernanke told colleagues.
Three weeks later, the situation had worsened to the point that the Fed called an emergency meeting.
"It's more than obvious that we have an extraordinary situation," Bernanke said. "It is not a single market. It's not like the 1987 stock market crash or the 1970 commercial paper crisis. Virtually all the markets --particularly the credit markets -- are not functioning or are in extreme stress ... I think everyone can agree that it's creating enormous risks for the global economy."
The magnitude of the crisis was finally sinking in with officials. The Fed decided to slash its key interest rate twice that month, and then in December, it cut the rate to near zero -- where it still sits five years later.
"As you know, we are at a historic juncture -- both for the U.S. economy and for the Federal Reserve," Bernanke said at the final meeting that year. "The financial and economic crisis is severe despite extraordinary efforts not only by the Federal Reserve but also by other policymakers here and around the world."
Even then, the Fed was still overly optimistic. The central bank predicted unemployment would peak at 8.25% in 2010.
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