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As crisis grew, Fed's Yellen wanted sharper rate cuts

Ann Saphir
Friday, 21 Feb 2014 | 5:56 PM ET

Feb 21 (Reuters) - As the financial crisis deepened in 2008, Janet Yellen argued at least twice for a more aggressive cut to interest rates than most of her colleagues at the Federal Reserve, internal documents unsealed on Friday showed.

For Yellen's critics, who worry the new Fed chair is a policy "dove" partial to overly easy monetary policy, that revelation will add grist to their mill.

But at the same time the transcripts of that year of fraught decision-making at the Fed will equally make the case for those who applaud Yellen for seeing the depth of the crisis before others and advocating an aggressive response, even more so than then-Fed Chairman Ben Bernanke.

At both a top-secret conference call in early January 2008 days after a dismal jobs report and another one in October just weeks after Lehman Brothers' market-shaking collapse, Yellen argued the need for a more muscular policy response.

"I support a 50-basis-point (half-percentage-point) reduction in the federal funds rate in the near future," she said on January 9, adding that she would prefer to cut rates by a quarter-point that very day, more than two weeks before the Fed's regularly scheduled meeting.

It was not to happen. Though Bernanke said he thought a rate cut would be needed soon, he had called the meeting not to take policy action but to gather his colleagues' thoughts ahead of a speech and congressional testimony. He wanted input on the signals he ought to convey to financial markets.

By the time the Fed did cut rates on January 21, it opted for a hefty three-quarter-point move.

Yellen, who at the time ran the San Francisco Fed, also called for stronger action during a conference call on October 7, about three weeks after Lehman Brothers failed and sent shock waves through financial markets.

Bernanke was using the call to gather support for a half-point cut.

"In my opinion, a larger action could easily be justified and is ultimately likely to prove necessary," Yellen said on the call. "We're witnessing a complete breakdown in the functioning of credit markets, and it is affecting every class of borrowers."

Despite her calls for more action, Yellen was not the most "dovish" of Fed policymakers at the table. That label goes to Boston Fed President Eric Rosengren, who called for a rate cut in September when the rest of the policy-setting panel, including Yellen, preferred to leave rates alone.

Yellen has sought to portray herself as even-handed, supporting rate cuts when merited, but equally supporting rate increases when needed.

That view of her policy proclivities is also borne out by the transcripts, which show that in the middle of 2008 - before Lehman's failure - she was open to the possibility of a rate rise by the year's end.

"Assuming that the data on growth and inflation come in roughly as I ... expect, I would envision beginning to remove policy accommodation toward the end of this year," Yellen said at a June meeting.

Still, she was far from confident that forecast would pan out even though incoming data had eased her fears of a severe recession. "Given the numerous large and worsening drags on spending, a couple of months of data aren't enough to convince me that we are on a solid trajectory," he said.

By the end of the year, she was no longer in doubt.

"I think the forecast is grim," she said in December, when policymakers cut rates to near zero.

She was not alone. Indeed, the word "grim" was used that day by two of the Fed's most hawkish policymakers, Richmond Fed President Jeffrey Lacker and Philadelphia Fed chief Charles Plosser.