Federal Reserve Chairman Alan Greenspan, whose
words can send markets soaring or plunging, normally cloaks his
public utterances in a haze of obfuscation. But new transcripts
show the private Greenspan can be very direct when he feels the
The Fed on Wednesday released hundreds of pages of transcripts
of its secret deliberations for 1994, a year in which the central
bank embarked on a series of rate increases aimed at slowing the
economy, and also agonized behind closed doors about how to respond
to growing demands in Congress that the Fed drop some of its
The minutes for the Feb. 3-4 meeting of the Federal Open Market
Committee, the group of Fed policy makers who set interest rates,
show the group split over whether the federal funds rate, the
interest that banks charge on overnight loans, should be increased
by a quarter percentage point or a half percentage point.
Many on the panel called for a half-point rate increase, saying
it was needed to keep the Fed from falling behind in its battle to
keep inflation from getting out of hand.
But Greenspan argued that since the Fed had not made any changes
in the funds rate in three years and had not raised the rate in six
years, a more gradulalist approach of just a quarter-point increase
was called for. He said anything larger ran the risk of sending
stock and bond markets into a steep nosedive.
"Were we to go the 50 basis points with the announcement effect
and the shock effect, I am telling you that these markets will not
hold still," Greenspan said. "I've been in the economic
forecasting business since 1948 and I've been on Wall Street since
1948 and I am telling you I have a pain in the pit of my stomach.
... I've seen these markets this is not the time to do this."
Greenspan's argument carried the day and in the end the panel
voted 10-0 to boost the funds rate by only a quarter point.
Greenspan also prevailed in getting his colleagues to make a
major change in how they released information on the change in the
Greenspan proposed that for the first time the Fed issue a
statement immediately after they had decided to boost the funds
The funds rate is the key interest rate controlled by the Fed.
Prior to 1994, the central bank did not announce when it had made
changes to this rate. Investment houses employed an army of Fed
watchers who carefully scrutinized the daily operations of the Fed
in buying and selling government securities for clues on when the
central bank was changing interest rates.
While these Fed watchers usually read the Fed's signals
correctly, there were some famous mistakes. And the old process
gave an advantage to big banks and brokerage firms who could afford
to hire their own analysts. The official confirmation of changes in
the funds rate came only after an eight-week delay when the Fed
released a sanitized version of its minutes.
In proposing that the Fed make an announcement of its Feb. 4
increase immediately, Greenspan noted that it would be the Fed's
first change in the funds rate in three years and in those
circumstances he said there should be no "ambiguity" about what
the Fed was doing.
"As far as I'm concerned, I would like us to stand up and be
counted. We are the central bank and we are making a major move,"
he told his colleagues.
Greenspan won this argument as well even though several of his
colleagues worried that a process of publicly announcing changes in
the funds rate would take away some of the Fed's flexibility.
That first brief statement on the funds rate has been followed
by public announcements of rate changes that have now become
In the period of February 1994 through February 1995, the Fed
boosted the funds rate seven times, moving it from 3 percent up to
6 percent as the central bank successfully engineered a so-called
soft landing, in which the economy slowed enough to keep inflation
under control without pushing the country into a recession.
The current economic expansion celebrates its ninth birthday
this month, and last month became the longest period of
uninterrupted growth in U.S. history. The Fed has raised the funds
rate four times since June. It now stands at 5.75 percent and many
analysts are looking for at least two more increases in the months