Federal Reserve transcripts released Friday lay out how Chair Jerome Powell drove a major policy shift during the most challenging period of the Covid-19 crisis. The records detail closed-door debates from 2020, illustrating how Powell strongly advocated for explicit promises regarding interest rates, even as several officials voiced concerns that such a move could constrain the central bank in the future. These reservations, however, remained largely private at the time of the discussions.
The pivotal September 2020 meeting occurred six months into the pandemic, with interest rates already positioned near zero since March. Powell argued that the prevailing circumstances demanded straightforward guidance. He sought to have the Fed clearly articulate the specific conditions that would need to be met before interest rates could be raised again. The objective was to foster an economic recovery that he anticipated would require years to fully materialize, rather than mere months. While some policymakers expressed objections, the majority ultimately aligned with his proposal.
Powell Navigates Internal Resistance to Establish Rate Guidance
The released transcripts reveal Powell's persistent efforts to embed language into the policy statement that linked future rate hikes to two key conditions: achieving maximum employment and reaching a 2 percent inflation target, with inflation sustained above that level for a period. This language was subsequently included in the public statement following the meeting.
At that juncture, inflation, as measured by the Fed's preferred gauge, stood at 1.3 percent. The median forecast projected that inflation would not reach the 2 percent threshold until 2023. This projection, however, proved to be inaccurate. Inflation surged significantly in the subsequent year, peaking at 7.2 percent in mid-2022. Despite this substantial increase, many officials, including Powell himself, initially characterized the rise as transitory and delayed their policy response.
Two policymakers dissented during the September 2020 meeting. Dallas Fed President Rob Kaplan opposed the commitment to maintaining near-zero rates. Minneapolis Fed President Neel Kashkari advocated for an even more robust commitment. Other officials, such as Eric Rosengren of Boston, Tom Barkin of Richmond, and Raphael Bostic of Atlanta, shared Kaplan's reservations but did not vote against the policy. Voting members Patrick Harker from Philadelphia and Loretta Mester from Cleveland also articulated concerns. Mester described the new liftoff rules as highly significant and indicated she would have preferred more extensive deliberation before implementing such a change, though she ultimately supported the final decision.
Powell rejected the notion of further delays. He informed his colleagues that the economic expansion was underway and that the policy messaging needed to reflect and support the long road to recovery. He emphasized that postponing action could undermine the Fed's credibility, particularly after maintaining a steady policy stance for six months.
Powell Argues Against Weaker Guidance to Avoid Past Policy Errors
The September debate followed a significant policy overhaul announced the preceding month. The Federal Reserve had revised its approach to managing inflation and employment.
Officials moved away from the practice of raising interest rates prematurely solely based on a decline in unemployment. This previous approach had proven ineffective over many years, as low unemployment rates had not consistently translated into higher inflation.
The transcripts indicate Powell's concern that financial markets and the public might not believe the Fed's commitment to the new framework. He warned that a less assertive form of guidance would resemble the reactive approach adopted by the Fed for the previous eight years. He advocated for strong language to underscore the reality and significance of the policy shift.
Five years later, these internal discussions have become publicly accessible. The Fed typically releases edited minutes three weeks after each meeting, but full transcripts are only made available after a five-year period. Critics now contend that the firm guidance implemented at the time may have slowed the Fed's response to the subsequent surge in inflation.
In November 2022, after rate hikes had already commenced, Powell publicly expressed regret regarding the policy. Speaking at the Brookings Institution, he stated that the guidance linking rate liftoff to both employment and inflation was a decision he would not repeat. He clarified that while it was not directly tied to the inflation surge, he would still refrain from implementing such a policy again.
The transcripts also reveal Powell's early recognition of COVID-19 risks. On March 2, 2020, prior to the virus's significant impact on the United States, he described growing concerns following a G-20 meeting in Riyadh, predicting that the virus was likely to spread globally. He informed officials that markets required a clear signal that central banks understood the threat and were prepared to act swiftly to prevent tighter financial conditions. On that same day, the Federal Reserve reduced its benchmark interest rate by half a percentage point.