During crisis, Yellen among biggest Fed pessimists

Kevin Lamarque | Reuters Federal Reserve Chair Janet Yellen adjusts her glasses as she testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on "Semiannual Monetary Policy Report to Congress" on Capitol Hill in Washington, February 24, 2015.

Kevin Lamarque | Reuters
Federal Reserve Chair Janet Yellen adjusts her glasses as she testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on “Semiannual Monetary Policy Report to Congress” on Capitol Hill in Washington, February 24, 2015.

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At the height of the financial crisis in 2009, Janet Yellen told her colleagues things were so bad that people were literally breaking into piggy banks to get cash.

The Federal Reserve chair, who headed the central bank’s San Francisco district at the time, tried to lighthen the mood a bit at an otherwise grim Federal Open Market Committee meeting in March.

“Another disturbing sign of how tough things are getting is that people appear to be breaking into their piggybanks to make ends meet—the Cash Product Office reports huge increases in the amount of coins being brought into our inventory,” she said then to the laughter of her colleagues. “The December inventories of quarters and dollar coins were up more than 50 percent from 2007, and even pennies were up nearly 25 percent.”

Yellen’s remarks were part of a release Wednesday of transcripts from the 2009 FOMC meetings. The timing was critical as the U.S. economy was mired in recession and trying to find a way out of the financial crisis. March, however, marked a bottom for the stock market, which has rebounded more than 210 percent since then.

Despite her seemingly lighthearted remarks—she earlier joked about her 401(k) plan, Yellen painted a grim picture of what was ahead.

“Looking ahead, some more-optimistic forecasters have argued that we’re likely to see a rapid V-shaped recovery similar to the ones that followed several past severe postwar recessions,” she said. “But my fear is that we may not even get a modest U-shaped recovery, much less a V-shaped one.”

That year marked an important time for the Fed: Interest rates had just been dropped to zero in late 2008, and the central bank was at the beginning stages of quantitative easing. Then-Chairman Ben Bernanke oversaw the efforts to manage the global financial crisis’s broader economic effects, leading the ambitious buying spree of mortgage-backed securities officially launched in December 2008.

While the outcomes of these actions were not obvious to a nervous world, the Fed chairman publicly promised success.

“The global economy will recover, but the timing and strength of the recovery are highly uncertain,” Bernanke said in a speech at the London School of Economics at the beginning of 2009.

By year’s end, Yellen’s move had changed a bit for the better, but she remained concerned with trends.

At the December meeting, she said she expected the economy “to grow only modestly” while inflation would be “running below my preferred rate for a very long time.”

The latter comment has manifested itself in current policy as the Fed chair has been a leading policy dove, preferring to keep rates near zero even as the unemployment picture has improved significantly from its crisis depths.

“The bottom line is that we are faced with a situation in which inflation is undesirably low, and, even with large monthly employment gains, the level of resource slack will remain high for an extended period,” she said at the meeting. “In my forecast, the zero bound and the limits on unconventional policy constrain us from pursuing a more desirable and more expansionary policy for some time to come.”

Yellen’s dim views—she quoted one source who said, “It’s become fashionable not to be hiring”—conflicted with some of her colleagues who believed things were getting better.

Then-Kansas City Fed President Thomas Hoenig said he was “relatively optimistic about the economy,” citing manufacturing gains specifically.

—CNBC’s Everett Rosenfeld contributed to this report.

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