by Calculated Risk on 1/18/2013 01:48:00 PM

Here are the Fed transcripts for 2007.

From the WSJ: Fed's 2007 Transcripts Show Shift to Alarm

The Fed entered 2007 with interest-rate policies on hold and many officials comfortable about the economic outlook. By year-end, the U.S. was in recession ...

Fed Chairman Ben Bernanke ... was often behind the curve in his economic outlook. In January, for example, he projected that the "worst outcomes" for housing had become less likely. In May, he said he saw "good fundamental reasons to think that growth will be moderate."

He began to see after midyear that strains in financial markets threatened to move beyond housing to the broader economy and financial system. Mr. Bernanke himself slowly took on a more interventionist stance, but appears to have embraced that position reluctantly.
...
Meanwhile, Janet Yellen, then president of the Federal Reserve Bank of San Francisco and now the central bank's vice chairman, became increasingly alarmed about the growing risks to the economy as the year progressed.

"I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector," she said in June 2007. "The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst."

By December, she was pushing the Fed for aggressive responses to the crisis. "At the time of our last meeting, I held out hope that the financial turmoil would gradually ebb and the economy might escape without serious damage. Subsequent developments have severely shaken that belief," she said in December.

One of my ongoing criticisms of Bernanke was that he was "behind the curve".

And some excerpts from FT Alphaville: From subprime to crisis: the Fed’s 2007 transcripts and 2007 FOMC transcripts: a few more excerpts. Janet Yellen in September 2007:

"We see a large drop in house prices as quite likely to adversely affect consumption spending over time through a number of different channels, including wealth effects, collateral effects, and negative effects on spending through the interest rate resets. A big worry is that a significant drop in house prices might occur in the context of job losses, and this could lead to a vicious spiral of foreclosures, further weakness in housing markets, and further reductions in consumer spending. ... at this point I am concerned that the potential effects of the developing credit crunch could be substantial. I recognize that there’s a tremendous amount of uncertainty around any estimate. But I see the skew in the distribution to be primarily to the downside, reflecting possible adverse spillovers from housing to consumption and business investment."

And from the WaPo Wonkblog: The Fed’s 2007 crisis response: Twinkies, pessimism pills, and missed warnings.