Records from the Federal Reserve's 2020 policy meetings, made public on Friday, reveal that Chair Jerome Powell strongly advocated for a key decision that he later admitted regretting. These records, sealed for five years, shed light on how the Fed committed to its interest rate guidance during the pandemic—a commitment many critics view as a major factor contributing to the Fed's slow response to soaring inflation.
The September 2020 meeting records show that Powell strongly advocated for establishing powerful and specific interest rate guidance, explicitly stating that the Fed would keep rates near zero until the labor market reached maximum employment and inflation rose to 2% and was projected to moderately exceed that level for some time. Despite opposition from several colleagues, Powell ultimately won the debate.
This commitment ultimately became a constraint on the Fed's ability to combat inflation. At the time, the Fed projected that inflation would not reach 2% until 2023; however, inflation began to surge the very next year, peaking at 7.2% in mid-2022. Many Fed officials, including Powell, initially dismissed the inflation as "transitory," delaying interest rate hikes in response.
Powell acknowledged this mistake during a Brookings Institution event in November 2022. He stated: "There is one part of the guidance we gave that I might not do again, which is we said we won't raise rates until we see maximum employment and price stability. I don't think I would do that again."
The meeting records indicate that Powell clearly expressed the necessity for immediate action at the September 2020 meeting, showing reluctance to wait any longer.
Powell said at the meeting:
"As the economic recovery proceeds smoothly, now is the time to focus our policy and communication on supporting the economy through the long journey to a full recovery. I see no need to wait any longer, and I am pleased that we have maintained a wait-and-see stance for six months. I think that was wise. But we are still far from our goals, and further delay could damage the credibility we have built."
Powell was also concerned that without stronger guidance, external observers might believe the Fed was not truly implementing its new policy framework. The meeting took place just one month after the Fed announced a historic adjustment to its monetary policy strategy framework, effectively abandoning a decades-long practice of preemptively raising interest rates when the unemployment rate was deemed too low to prevent inflationary pressures from building up.
"It would be easy to slip back into a situation where people say, 'There's nothing new here.' In fact, this is already happening. People are talking about it now. So I think this is important," Powell told his colleagues. "A significantly weakened forward guidance, in my view, would sound very much like the reaction function we have been using for the past eight years."
The records reveal that several Fed officials had reservations about this strong commitment, but ultimately did not publicly express their dissent.
In the formal vote, then-Dallas Fed President Rob Kaplan and then-Minneapolis Fed President Neel Kashkari cast dissenting votes. Kaplan opposed making such a strong commitment to near-zero rates, while Kashkari advocated for an even stronger commitment.
However, the records show that several other policymakers who did not have voting rights at the time shared Kaplan's concerns, at least to some extent. This group included then-Boston Fed President Eric Rosengren, Richmond Fed President Tom Barkin, and Atlanta Fed President Raphael Bostic. Then-Philadelphia Fed President Patrick Harker and Cleveland Fed President Loretta Mester, who had voting rights, also expressed concerns but ultimately supported the decision.
Mester believed that changing the threshold for rate hikes was a very significant move. She stated: "I would have preferred to wait until the committee had the opportunity to fully discuss the implications of this commitment before making such a change."
The consequences of this interest rate guidance became apparent over the following two years. In September 2020, the Fed's preferred inflation gauge was at 1.3%, and the median forecast among policymakers was that inflation would not reach 2% until 2023. But inflation began surging the very next year, reaching a peak of 7.2% in mid-2022.
The Fed did not begin raising interest rates until March 2022, by which time inflation had been significantly above target for several months. Many critics believe the strong commitment made in September 2020 was a key factor in the Fed's delayed action.
The Fed releases edited minutes of its policy meetings three weeks after each meeting, but the full transcripts are not made public until five years later. The release of the 2020 records provides a new perspective for understanding the Fed's critical decisions during the pandemic.
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