What happened to the rate cut?
Many observers, especially those on Wall Street, expected the Federal Open Market Committee to drop its target for the federal funds rate on Tuesday. After all, the chairman himself, Alan Greenspan, had hinted at such a possibility in a speech earlier this month.
But when the Fed’s media representative handed out the press releases early Tuesday afternoon, there was no action and only a hint at possible action in the future.
Many might find that strange given the recent evidence of a slowing economy. The early estimates of output for the third quarter were revised downward. The Conference Board’s most recent tabulation of its Index of Leading Indicators indicated slowing. And the National Association of Home Builders said that its housing market index had dropped to the lowest point in 2 years.
Popular financial gurus have been castigating the Fed for suffocating stock markets with an overly tight monetary policy.
So what happened? The simple answer may be that Greenspan did not think the time was right.
The more likely answer is that he wasn’t able to convince the full committee of the need for immediate loosening. Contrary to most popular opinion, Greenspan doesn’t make U.S. monetary policy all by himself.
Key decision are made by the Federal Open Market Committee, one of the most important but least understood institutions in U.S. government. It consists of all members of the Fed’s Board of Governors—who are appointed by the president and confirmed by the Senate—plus five out of 12 presidents of regional reserve banks, in a complicated annual rotation.
When the FOMC was put into its current configuration in 1935, an implicit assumption was that the governors on the committee were to look out for the overarching national interest, while the district bank presidents would represent the interests of their particular geographic regions.
Many also assumed that such district presidents, closely in touch with businesspeople in their districts and reporting to local boards of directors, would be a lobby for looser monetary policies and that the governors would be the anti-inflation hawks.
That was the theory. But in practice over the past two decades, the district presidents have been the tight-money hawks, at least compared to the governors.
Presidents such as Richmond’s Al Broaddus, Minneapolis’ Gary Stern and Cleveland’s Jerry Jordan haven’t been afraid to publicly dissent from majority votes to lower interest rates or votes to stand pat when they felt tightening was indicated.
More important, with the exception of Dallas’ Bob McTeer, who dissented twice on the dovish side in 1999, many of the district presidents reportedly have argued strongly for tight money even when they did not vote or dissent.
While only five presidents are official, sworn, voting members of the Committee in any given year, all 12 attend the meetings, sit at the same table and participate in the same discussion. Minneapolis’s Stern is not a voting member this year, but he reportedly expresses his views strongly.
Broaddus and Jordan are voting members in 2000 and may have dug in their heels at Tuesday’s meeting, the last at which they can vote until their turns come up again in 2003 and 2002, respectively.
An additional complication is that the Board of Governors is short two members, following the resignations of Susan Phillips in 1998 and Alice Rivlin in 1999. President Clinton, for whatever reason, has never nominated their replacements.
So for most of the past two years, rather than a 7-5 preponderance of governors over district presidents, the two have been evenly matched, 5-5.
When the committee takes action, but some members dissent, their dissent and an explanation for the views behind it are published in the minutes of the meeting, which is released to the public about six weeks later. But when no action is taken, it is hard to tell even from the minutes just what happened.
Part of the mystique of the chairmanship is due to the fact that the minutes do not clearly show it when he loses an argument. A politically adroit chair, Greenspan holds his own cards close to his chest and waits to judge the prevailing sentiment of the committee before proposing any action.
If he judges that he can’t swing it his way, he can choose to wait for the next meeting, rather than risk the humiliation of losing a vote or winning one with several dissents.
Tradition is that the chair always joins the majority vote. So it’s entirely possible that Greenspan went into Tuesday’s meeting hoping to bring off a rate cut, but was unable to prevail. We won’t know for sure until the full transcript of the meeting is made public five years from now.
The FOMC may be something like the Electoral College—an institution whose complicated internal workings can be safely ignore most of the time.
In more than 50 presidential elections, the Electoral College really only has mattered four times. Similarly, over 13 years of chairing the FOMC, Alan Greenspan may have failed to get his way only a few times.
But Tuesday may have been one of them.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.