Fed's Jekyll Island Forum Considers Lessons of History for Monetary Policy
The coastal Georgia island where a secret 1910 meeting produced a blueprint for the Federal Reserve led central bankers 100 years later to consider the lessons of history as they move into new monetary territory.
Philadelphia Fed President Charles Plosser, citing continuing debate about the Fed’s role in the Depression, said that “humility is in order” for policy makers trying to make the right decisions today. Former Minneapolis Fed President Gary Stern said the 1990-91 recession shows the current recovery may take “a while” and the housing bubble last decade, fueled by low interest rates, suggests officials shouldn’t wait too long to tighten credit.
Plosser and Stern joined Fed Chairman Ben S. Bernanke and other current and former officials Nov. 4-6 in Jekyll Island, Georgia, to discuss the Fed’s origins and decisions and, at times, their relevance to the more-recent financial crisis and last week’s expansion of record monetary stimulus. Bernanke argued that current Fed policy doesn’t represent as much of a departure from the past as some critics assert.
“It will be at least 50 years before we really understand very well what happened in 2008-2009, and we will be interpreting for another 50 years as to whether the Federal Reserve undertook the right policies or the wrong policies,” Plosser, 62, the Philadelphia Fed chief since 2006, said during an audience discussion at the conference, co-sponsored by the Atlanta Fed and Rutgers University. “There’s a lot of history left to be written.”
Bernanke used an unscripted appearance at the conference to expand his defense of the Fed’s Nov. 3 decision to buy $600 billion of Treasuries in a bid to lower unemployment after reducing the benchmark rate almost to zero in 2008 and purchasing $1.7 trillion of securities through March 2010.
“There is not really in my mind as much discontinuity as people think” with past policies, Bernanke said in a panel discussion with his predecessor, Alan Greenspan, and former New York Fed President E. Gerald Corrigan. “The standard considerations suggest that we should be using expansionary monetary policy, and that was the purpose of the action. Again, nothing extraordinary, just a different set of tools to achieve essentially the same kind of results.”
Still, the specter of runaway inflation in the 1970s, beaten when former Fed Chairman Paul Volcker allowed interest rates to rise as high as 20 percent, loomed large.
Corrigan distributed remarks to attendees saying that “efforts to achieve an upward nudge in today’s very low inflation rate make me somewhat uncomfortable,” and he made a similar point during the panel discussion. At the same time, he said he has a “very high degree of confidence in the Fed’s ability to navigate through these uncharted waters.”
Former Cleveland Fed President Lee Hoskins said at the conference that the central bank now is “in a position of running a policy that has more risks than potential benefits.”
In the early 1970s, there was the idea that “they could buy a little more employment by running a little higher inflation rate, and people were really caught up in that idea, that they could manipulate the unemployment rate through monetary policy,” Hoskins, who served from 1987 to 1991, said in an interview. “That turned out to be a grievous error.”
The period following the 1990-91 recession is also relevant to today’s situation, said Stern, who retired in 2009. “If you go back to that period, you’d see that there are significant financial headwinds,” with a collapse in savings-and-loan institutions and excess capacity in hotels and office buildings, he said.
“It’s not precisely similar to today, but there are a lot of similar characteristics, and it took a while for employment to pick up significantly,” Stern said in an interview. “I’m afraid that one of the lessons of history is it just takes a while” for the recovery to unfold, “especially when you’ve been dealt the kind of financial disruption that has occurred.”
Fed Governor Kevin Warsh, in an opinion piece published today on the wall Street Journal’s website, said the Fed can lose its “hard-earned credibility -- and monetary policy can lose its considerable sway -- if its policies overpromise or under deliver.” He said the bond purchases must be monitored for risks posed to market-set prices, as the Fed becomes “more of a price maker than a price taker.”
On the island, the organizers ensured people were surrounded by Fed history. Arriving attendees checked in at the Jekyll Island Club Hotel’s Federal Reserve Room, adorned with portraits of the “Six Men From the Elite of the Banking and Financial World” who in November 1910 avoided reporters, retreated to the isolated resort and devised a plan for a central bank.
The Jekyll Island talks, prompted by the Panic of 1907, produced the Aldrich Plan, named for Senator Nelson Aldrich of Rhode Island. The plan proposed a central bank with regional reserve banks, forming the core of what would become the Fed. While the Senate didn’t act on the plan, in 1913 Congress approved a Fed that ensured federal control of the system with some bank representation.
The latest conference took place in an indoor tennis court turned into a banquet hall and named after financier John Pierpont Morgan. Toward the rear of the hall stood an exhibit on the 1910 expedition, created by the Jekyll Island Museum for the conference.
Corrigan, in the panel discussion, recalled that the Saturday meeting in 1979, during which Volcker led Fed policy makers in starting the inflation fight, had secrecy similar to Jekyll Island in 1910: Participants “were instructed at great lengths to arrive in Washington in a surreptitious fashion” and stay at different hotels, and the “heavy drapes” inside were closed, Corrigan said.
“It was really quite dramatic,” Corrigan said. “Everyone realized the short-run consequences, which were going to be quite dire” for the economy, he said.
Volcker, who didn’t attend the conference, delivered a videotaped message saying “we’re tempted to think that the Federal Reserve has never been so challenged as in these recent years.”
“That may be true,” said Volcker, chairman of President Barack Obama’s Economic Recovery Advisory Board. It’s also true that the Fed has had “a lot of controversies and challenges,” he said. At the same time, the Fed “has taken heroic action in recent years. It’s acted fully up to the limits of its authority.”
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