Today we finally have the transcript of the FOMC's remarkable Sept. 16, 2008, meeting (PDF), where days after the collapse of Lehman Brothers and months into a recession the Fed decided against an interest rate cut on the grounds that gasoline prices had been high over the summer (yes, really). None of the voting members dissented from this.
But nonvoting Boston Fed President Eric Rosengren did speak up, as a monetary policy hero:
Thank you, Mr. Chairman. I will be brief. This is already a historic week, and the week has just begun. The labor market is weak and getting weaker. The unemployment rate has risen 1.1 percentage points since April and is likely to rise further. I am not convinced that the unemployment rate will level off where the Greenbook is assuming currently. The failure of a major investment bank, the forced merger of another, the largest thrift and insurer teetering, and the failure of Freddie and Fannie are likely to have a significant impact on the real economy. Individuals and firms will become risk averse, with reluctance to consume or to invest. Even if firms were inclined to invest, credit spreads are rising, and the cost and availability of financing is becoming more difficult. Many securitization vehicles are frozen. The degree of financial distress has risen markedly. Deleveraging is likely to occur with a vengeance as firms seek to survive this period of significant upheaval. Given that many borrowers will face higher interest rates as a result of financial problems, we can help offset this additional drag by reducing the federal funds rate. I support alternative A to reduce the fed funds rate 25 basis points. Thank you.
It amazes me that more people didn't find this persuasive. Across the board participants saw a worsening economy and falling commodity prices. Clearly if the economy had been improving and commodity prices rising, tighter money would have been warranted. So why wasn't looser money warranted by this?