About That Feudin', Fussin', And Fightin' At The Fed . . .
Reports of Alan Greenspan's demise are greatly exaggerated.
By some accounts, the Federal Reserve Board chairman is losing his clout in an uprising by underlings. Fed policymakers are organizing into warring camps--inflation hawks vs. recession doves, presidents of the regional Federal Reserve banks vs. governors at the Washington headquarters. Monetary policy--and the fate of the economy--is caught in the cross fire. If the recession is deepening, as many fear, the deadlocked Fed can't spring to its rescue.
In truth, all is not sweetness at the central bank. Policymakers disagree on procedures and on the economic outlook. But Fed officials have trouble recognizing the dissension-wracked institution portrayed lately in published accounts. Says a Fed insider: "They got the details right--they just misread the meaning."
The furor has its roots in a technical dispute, first reported by former Fed Vice-Chairman Manuel H. Johnson Jr. in a newsletter to consulting clients. On Feb. 1, Fed governors voted to cut the discount rate--the interest charged banks that borrow directly from the 12 regional Fed banks. Greenspan decided that the half-point cut, to 6%, should be reflected by the more widely watched federal funds rate. That rate--what banks charge each other for overnight loans--is set by the Federal Open Market Committee, made up of the governors plus Fed bank presidents.
Most of the time, the fed funds rate indicates whether the central bank is trying to stimulate or slow money growth and the economy. But the discount rate can complicate matters. So the FOMC worries about the spread between the discount and fed funds rates. To keep the spread fixed, board members believed the funds rate should fall to match the discount rate. Otherwise, the Fed wouldn't be loosening credit.
NO VOTE. In a phone conference on Feb. 1, two of the regional presidents questioned whether such a large rate cut would exceed Greenspan's authority to act between committee meetings. But none of the members pressed for a vote, and the Fed cut the funds rate.
When the FOMC took up the question at meetings on Feb. 5 and Mar. 26, the members agreed to disagree. The interaction between the funds and discount rates is so imprecise, they decided, that the chairman needs to have lots of discretion. The FOMC didn't bar Greenspan from acting between meetings.
Such rows, even over arcane matters, weren't likely under Arthur F. Burns or Paul A. Volcker, two of Greenspan's most powerful predecessors. Burns and, in a lesser way, Volcker ran a one-man show: The chairman set policy and was the policy spokesman, and heaven help an FOMC member who said otherwise.
But things started to change in the mid-1980s. Earlier Administrations often appointed governors from the ranks of senior Fed staffers. Presidents Reagan and Bush went outside the Fed and chose members more likely to think independently. Regional presidents tend to be more intellectual than their predecessors--and, many Fed-watchers believe, grasp economics and finance better than the governors. Greenspan encourages open debate, even at the cost of some confusion over where the Fed is going.
That confusion is particularly evident at times like this. Like private forecasters, Fed policymakers are deeply divided over the outlook. They fall into three groups. Optimists, such as San Francisco Fed President Robert T. Parry, believe the recession is hitting bottom. They build their case for recovery on recent increases in housing starts, consumer confidence, purchasing managers' outlook, the strong rebound in money growth, and other leading indicators. Skeptics, such as Atlanta Fed President Robert P. Forrestal, point to continued job losses and sluggish spending as signs that the economy needs lower rates. And a few hard-liners, led by Cleveland Fed President W. Lee Hoskins, think the Fed shouldn't react to economic growth at all; they focus solely on money-supply growth and inflation.
CAUTION. Greenspan sees signs that recovery is coming--but he would rather buy some insurance by cutting rates a bit more. Inflation worries, rather than dissension within the ranks, was the reason the Fed held off cutting rates even when March unemployment rose to 6.8%. Disappointed by the Fed's failure to lower rates, investors sent the Dow Jones industrial average down some 50 points over three days.
Any lingering disputes at the Fed might affect when it acts--but timing isn't everything. "Whether they act on Apr. 15 or Apr. 30 has absolutely no effect on the economy," says Richard B. Hoey, chief economist at Barclays de Zoete Wedd Inc. More important is that a more open Fed, with more internal debate, might reach better decisions. Greenspan has avoided the stop-and-start policy that hurt the economy in the 1960s and 1970s. As long as he gets results, he'll be able to handle any critics at the Fed.