Once again, it’s Fed time. And of course what I mean by that is that it’s Greenspan time. The markets will want to know what Greenspan has decided about interest rates (to be announced Wednesday afternoon), and then the markets will want Greenspan to know what it thinks of his decision.
Obviously I’m leaving something out: All the members of the Federal Open Market Committee who do not happen to be Alan Greenspan. I’m not the only one who leaves them out. The convention is to talk about what Greenspan is doing or thinking or saying or not saying. In light of that, do all those non-Greenspans even matter?
Well, sure. How much they matter is harder to say, of course, but here’s a basic overview. The FOMC currently has 10 members, though it is designed to have 12. Seven of these seats belong to the members of the Fed’s Board of Governors, of which there are, at the moment, only five. The two openings will be filled by presidential appointment.
Just so you can dazzle your friends next time a game of name-that-FOMC-member breaks out at a dinner party, the other governors are: Vice Chairman Roger Ferguson, a Clinton appointee who has been a McKinsey & Co. partner and a lawyer for Davis, Polk, & Wardwell; Edward Gramlich, another Clinton appointee who is a longtime academic with some government experience; Edward Kelley, who was appointed by Reagan and is the former CEO of Kelley Industries; and Laurence Meyer, a third Clinton pick, who is the founder of a consulting firm specializing in economic forecasting.
The eighth slot is reserved for the head of the New York branch of the Federal Reserve Bank; since 1993 this has been William McDonough. (He’s the guy who orchestrated the Long-Term Capital Management bailout.) Earlier he held a series of executive jobs at First Chicago Corp.
The remaining four slots go to the presidents of the other 11 regional Fed banks on a rotating basis. The current crew is Thomas Hoenig of the Kansas City bank, Cathy Minehan of Boston, Michael Moskow of Chicago, and William Poole of St. Louis. Other nonvoting regional presidents and a number of Fed staffers also join FOMC meetings.
So what goes on when these people get together? The specifics are secret, at least in the short term, but a general answer is that they seek consensus. Unlike, say, the Supreme Court, the FOMC is a body that generally acts unanimously, even if some of the voting members have expressed doubts or even conflicting views about whatever it is they’ve just voted in favor of. For example: At an FOMC meeting in November 1994, Greenspan and most of the committee were pushing a 75-basis-point (three-fourths of a percent) raise in the Fed funds rate, but then-Vice Chairman Alan Blinder thought that was overkill. “My personal preference is strongly for 50 [basis points],” he said at the end of a thoughtful soliloquy on the subject. Nevertheless, “I thought hard about whether I should dissent on this matter, and I did not decide until last night. I finally decided that I won’t.” Thus a unanimous decision to raise by three-fourths of a point; basically, the markets like consensus, and the FOMC delivers it.
Bob Woodward’s book Maestro (which recounts the episode above, although I took the quote from the transcripts available here) is largely animated by the theme of Greenspan building consensus—or at times building the appearance of consensus—and gives a good amount of attention to Blinder as one of the few FOMC players who at times entertained dissent at all. It’s possible that someone in the current membership has similar misgivings, but details of FOMC meetings never seem to leak, and the transcripts are released only after a delay of five years.
Minutes of the meetings are publicly available after a shorter wait, but they’re pretty vague on individual views. These, from the telephone conference that preceded April’s surprise half-point cut, note that “Although a few [committee members] preferred to wait until the next scheduled meeting, all the members supported or could accept a proposal for an easing of reserve conditions consistent with a reduction of 50 basis points in the federal funds rate to a level of 4-1/2 percent.” No word as to who it is that might have preferred to wait or precisely why.
Finally, other Fed governors and regional presidents give public speeches and congressional testimony that are parsed by Fed-watchers for clues about the thinking of the non-Greenspans. John Berry, the Washington Post columnist seen by many as the most astute Fed maven, sorted through various public statements in a recent piece that concluded “some” Fed officials are wondering why the cuts so far haven’t had a more noticeable effect on the economy.
While it might not sound like it, the Fed’s thinking is actually far more open to public scrutiny than it has ever been—not so long ago even its funds rate decisions had to be divined by watching the Fed’s buying and selling of Treasury bonds—and it’s possible that this trend will continue. But it’s not clear that anyone would really prefer a world in which Fed governors bickered and grandstanded. There’s something much more comforting about the notion that it’s simply Greenspan time.