Federal Reserve

Yellen during crisis: Things are so bad people are 'breaking into their piggybanks'

Janet Yellen
Kevin Lamarque | Reuters

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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. Through the year, her downbeat look on the economy contrasted with that of some members who believed that the seeds of a recovery were in place.

Ultimately, the Fed's "Greenbook" projections for employment and gross domestic product would be wrong. The unemployment rate would peak at 10 percent in October but remain at 9 percent or above until September 2011. Gross domestic product declined 2.8 percent for 2009 and has not eclipsed 2.5 percent annualized since.

"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.

Behind the scenes, he noted the uncertainty of the steps the Fed was taking. The bank ultimately would go through three rounds of QE's monthly bond buying, pushing the Fed balance sheet to $4.5 trillion. Bernanke admitted that it was an experiment.

"I think we all appreciate what an extraordinary situation we are in and have experienced for the last eighteen months. A lot of what we are doing is requiring our good sense and historical knowledge and our intuition," Bernanke said at the January meeting. "But as I think maybe the vice chairman (Yellen at the time) mentioned, we do not really have the historical basis for all of the things that we are having to deal with here."

By year's end, Yellen's mood 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.