I have referred to the June 2003 FOMC meeting many times before and I suspect that I will continue to do so long into the future. It was one of those events that should be marked in history, truly relevant to the future developments that became panic and now sustained economic decay. It’s as if the committee members at that time anticipated their current powerlessness – yet did nothing about it. Their preferred course from that moment until August 2007 was relieved ignorance.  

Despite the fact that the dot-com recession had ended more than a year and half before that gathering, the FOMC voted at that time to lower the federal funds target to just 1%. It was a serious difference in policy and something that nobody at the table seemed able to have imagined prior (not the least of which because they couldn’t ever explain the problem). Not only was the economy seemingly stuck after what was a really mild recession, there was the still looming implication of a slow-motion stock crash that for orthodox economists always conjured images of 1929. The FOMC saw sluggish recovery and were adamant about using monetary policy (as they understood it) to make sure the dot-com bust did no more damage than the first truly “jobless recovery.”

Since this was a paradigm shift in monetary policy, the Committee was forced to confront not just what it was doing but what it might someday “have” to do beyond it. The Bank of Japan had gone into QE as a world’s first just two years before, but until June 2003 nobody thought it would possibly apply to anywhere but Japan. Voting to lower the target to 1% provided that sober realization, suggesting if only for a moment of unusual clarity a non-trivial possibility that their confidence in themselves might not be as deep as they believed.

Chairman Alan Greenspan was blunt in his summation of the prospect, for once (likely because it was private) admitting that what lay ahead of them below 1% was not well understood. He had good reason to be apprehensive given the circumstances of that day:

One is that I don’t think we know enough about how the private financial system works under these conditions. It’s really quite important to make a judgment as to whether, in fact, yield spreads off riskless instruments—which is what we have essentially been talking about—are independent of the level of the riskless rates themselves. The answer, I’m certain, is that they are not independent. But how their dependency functions and how those spreads behaved in earlier periods is something I think we’ll need to know more about. The reason is that I don’t believe, as I said before, that we can construct an effective preemption strategy. Well, we can construct a strategy, but I’m fearful that it would not be very useful.

Greenspan raised this point in response to Dallas Fed President Robert McTeer’s report that banks and businesses in his district were resisting the Fed’s moves before ever getting to 1%. Some of that was associated with what the Committee and Greenspan called uncertainty, but in truth Greenspan (as in the quote above) was not entirely unsympathetic to what “ultra-low” might mean as potentially very different than more normal monetary operations – with good reason.