The Man Who's Rattling Greenspan & Co.

The Fed's William Poole could lead a monetarist revival

A sailing buff since boyhood, Federal Reserve Bank of St. Louis President William Poole loves to race his old-fashioned Thistle, the Adam S. The classic three-person dinghy was in vogue during the 1950s and '60s but was eclipsed long ago by sleeker designs. Poole's economic views are somewhat retro, too: He is a disciple of monetarism, a school of thought that had its heyday in the '70s and '80s.

But while his views may be out of intellectual fashion, Poole is suddenly in a position to affect the course of U.S. monetary policy. Just eight weeks after being hired by the board of the St. Louis Fed, Poole parted with Federal Reserve Board Chairman Alan Greenspan, dissenting from the May 19 decision of the Federal Open Market Committee to keep interest rates unchanged. He advocated an increase. Poole's dissent suggests that given his concerns about the rapid growth in the money supply and bank lending, he'd be reluctant to support a rate cut even if conditions in Asia weaken further.

MAKING ALLIES. It's rare for an FOMC member to dissent so soon after joining the policymaking group. But Poole, a respected economist from Brown University with long ties to the Fed, is convinced that the nation's money supply still provides the best map for steering clear of inflation--and he isn't being shy about it. "I felt completely comfortable speaking my mind and voting my best judgment," he said in a July 13 interview with BUSINESS WEEK.

Poole was joined in his May dissent by fellow monetarist Jerry L. Jordan, the veteran president of the Cleveland Fed. They fretted that the surge in the money supply and bank credit could cause an outburst of inflation. Given the "substantial monetary acceleration and accommodative financial conditions, we would be better off if we had a less accommodative posture at this point," Poole says.

Fed watchers believe that if money growth remains strong, Poole and Jordan may have other allies, including: Kansas City Fed President Thomas M. Hoenig, who has monetarist leanings and, like Poole and Jordan, is a voting FOMC member. "This is the year all of the monetarists are cycling in," says former Federal Reserve Governor Lawrence B. Lindsey, referring to the yearly rotation in which 5 of the 12 regional bank presidents vote with the seven governors in Washington. "The monetary aggregates are clearly signaling 3% to 4% inflation next year, so if you're a monetarist, you'd have to favor tightening."

Before Poole's arrival, Jordan had little sway in six years on the committee, perhaps in part because some colleagues view him as too doctrinaire. Poole is considered more pragmatic. Together, they may have a subtle impact over time on Greenspan, who until May had not been challenged by two dissenters in a single meeting since 1994. (The Fed won't disclose the vote at the July 1 FOMC meeting until August.)

To be sure, Greenspan still wields enormous power over the FOMC. His eclectic approach to monetary policy has kept the economy expanding for seven years, while inflation has fallen--the consumer price index rose just 0.1% in June. Greenspan probably could garner enough votes for a rate cut if he decided one was essential because of a crisis in Asia or a sharp U.S. slowdown. But he's unlikely to push one through over substantial opposition, because he knows the financial markets would get spooked if the FOMC were sharply split. The monetarists' defense "rules out any chance of a preemptive easing," says David M. Jones, chief economist for Aubrey G. Lanston & Co. "Their willingness to go public will serve as a rallying point for other hawks on the FOMC."

Poole's presence on the FOMC is making the money supply a bigger factor in the Fed's internal debates over monetary policy. Monetarists such as Poole have expressed concern that the monetary aggregate known as M2 has risen 7% over the past year. (M2 includes cash and checking accounts as well as savings and retail money-market accounts and certificates of deposit for less than $100,000.) Greenspan, in contrast, publicly disavowed M2 as a policy gauge in the early '90s, arguing that its predictive value was spoiled by changes in the way Americans chose to hold money. Although Greenspan recently has noted "tentative signs" that the relationship between money growth and economic output is reemerging, he says it is "uncertain how reliable that relationship will prove to be over time."

Poole has long worked to make money measures more useful. In the early 1990s, he helped develop what is now a widely followed indicator--which he dubbed MZM, for "money zero maturity"--that tracks M2 plus money-market funds held by institutions, and minus certificates of deposit. It's intended to measure all holdings that can be converted to spending money without penalties or risk of capital loss. Some Fed economists believe that MZM is a better measure of liquid money than M2 because it excludes CDs, which investors can't instantly cash in. The past year's 11.5% surge in MZM offers further proof to monetarists that money growth is too strong.

The affable Poole, who holds an economics PhD from the University of Chicago, leaves no doubt that the Fed should worry more about money-supply growth, even with inflation measures at low ebb. "We need to be looking down the pike, a year to three years ahead," he says. What about Asia? Poole doesn't believe the Fed should hold domestic policy hostage to that region's turmoil. "Our responsibility is first and foremost to the U.S.," he says. "We don't do the international economy any favors if we allow our economy to go off track."

NO NOVICE. Such outspoken views aren't normally aired by new FOMC members, who often bow to the institutional pressure to go with the flow. But Poole is hardly your typical novice bank president. While several current Fed presidents rose through the system's administrative route of overseeing check processing, Poole attended his first FOMC meeting when he was a Fed staff economist in the early 1970s.

During that stint, Poole, at age 32, finished what San Francisco Fed President Robert T. Parry praises as "a seminal piece of research." The paper--reflecting a less-than-pure brand of monetarism--argues that central bankers should monitor the relationship of both interest rates and money growth to economic activity and then give more weight to the more tightly linked of the two indicators in setting policy. With the Asian crisis temporarily distorting interest rates, Poole's model would augur for stressing the money stock.

In the decades since his first Fed job, Poole has taught at Brown, served as Jordan's successor on Ronald Reagan's White House Council of Economic Advisers, and been an outside adviser to New York Fed President William J. McDonough. Occasionally, Poole even urged McDonough to cast a dissenting vote on the FOMC--though the New York Fed chief never has.

Poole knows that dissents are most effective when used sparingly. Fed sources say he delivered a strong warning about inflation risks when he joined the FOMC on Mar. 31. But, says Poole, "I didn't want to dissent at my first meeting." On the other hand, as an avid sailor, Poole certainly knows that sailing against the wind is sometimes the only way to reach your destination.

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