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Fed Meeting Transcript Reveals Plain-Talking
Alan Greenspan

By Martin Crutsinger   Associated Press
WASHINGTON — 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 need.

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 secrecy.

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 funds rate.

Greenspan proposed that for the first time the Fed issue a statement immediately after they had decided to boost the funds rate.

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 routine.

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 ahead.

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