The FED before the crisis: perception errors or conception errors? analysis of FOMC minutes and Bernanke and Greenspan’s statements from 2001 to 2007

The article discusses the perceptions of the Fed in the years preceding the formation of the housing bubble to assess whether there was underestimation of risk or choice to live with them. In the aftermath of the crises of 2001-2002, Fed used to acknowledge consumption and housing market to be important forces in the economic recovery. From 2003-2004, the FOMC members were concerned about the speculative behavior in housing market and the effects the reversal of the expansionary monetary policy would have on property prices and on consumption, but, in spite of this perception, the FED did not adopt any initiative to contain what would prove to be a bubble of huge proportions. The Fed’s action to combat these threats was restrained by the belief in the strength of the deregulated financial system, by pragmatic confidence in the conduct of monetary policy guided by the risk management approach and the belief that the Central Bank should not act against the formation of bubbles. The article reviews the minutes of the FOMC and some pronouncements of the presidents of the Fed during the period, Greenspan and Bernanke, in order to understand the perceptions of the Fed on the ongoing process. The review of the FOMC´s minutes and speeches are justified because the communication with the market has become a relevant instrument of Fed’s monetary policy actions since the 1990s.

Federal Reserve; Monetary policy 2001-2007; Risk management approach