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Federal Reserve underestimated the crisis


Let’s face the truth: the Fed did not know that the Great Recession was coming until it was in the thick of the crisis (as CNN puts). Did the Fed do its job fast enough? As we are slowly recovering from the financial crisis, this question is worth to think about.

In January 2008, Ben Bernanke said “I think there are a lot of indications that we may soon be in a recession,” not knowing that one of the worst recessions since the Great Depression was already underway. He was not sure that it until after Lehman Brothers collapsed.

As we know, the Fed eventually decided to lower its interest rates to (almost) zero and launch bond-buying programs to stimulate the U.S. economy. However, the officials were not certain about their economic outlook and actions. Even after Lehman Brothers declared bankruptcy, they “could not agree on whether their decision to allow the investment bank to fail was the right move.” Eric Rosengren, the president of Boston Fed, said that although they were not sure about whether what they did with Lehman was right or not, they hoped they made the right move given the constrained that they had during that week. The Fed officials decided to hold off on lowering their key interest rate in September 2008.

However, the situation had worsened. However, Bernanke and the Fed realized that the situation was much worse than they thought. Bernanke said “it’s creating enormous risks for the global economy” in October 2008.  Then the Fed decided to cut its key interest rate to near zero.  CNN argues that the Fed was still overly optimistic. The central bank predicted that the unemployment rate would be 8.25% in 2010. However, it peaked at 10%.

Now the question is: is the Fed doing enough now or is it still too optimistic?

CNN Money