The Federal Reserve Board normally manages the nation’s credit supply with all the gravity of the Church of England. Once every six weeks, 12 governors and regional bank presidents meet secretly between the gold damask-covered walls of the Fed’s Washington boardroom to set the supply and price of bank credit. This Fed Open Market Committee issues no announcements. Instead, financial smoke signals are sent to the government bond market via manipulations of the so-called Federal Funds rate–the price of money that banks borrow overnight from one another. Experts decode these tiny shifts and interpret their meaning: “Fed tightens (or eases) credit!”
Last week this almost religious ritual suddenly looked more like a public food fight. A majority of FOMC hawks–led by regional bank president from Kansas City, MO., St. Louis and Cleveland–were revealed to have rejected the recommendations of Fed chairman Alan Greenspan in several recent votes, thereby delaying Fed efforts to ease the recession. The press treated the news as if the archbishop of Canterbury had lost control of his chapter house. DEMOCRACY COMES TO THE CENTRAL BANK, The Wall Street Journal declared on its front page. The New York Times headline: GREENSPAN’S AUTHORITY DIMINISHED.
In reality, the differences between Greenspan and the governors were minute. The hawks are obsessed with inflation and worry that cutting interest rates too fast might revive it. Greenspan is less worried and wants to push down rates to battle the recession. News that producer prices declined again in March seemed to support Greenspan’s view. Yet at most, the dispute has delayed the Fed’s rate moves by a month or so. Says Allan Meltzer, a Fed historian at Carnegie Mellon: “These sorts of arguments go on all the time. It’s a tempest in a teapot.”
What’s more interesting about the fight is the attention it draws to Fed secrecy. Traditional wisdom holds that “controlling credit is more an art form than a science, and a little mystery helps,” as Richard Fisher of Fisher Capital puts it. But some Fed watchers are seeing drawbacks to its exclusiveness. The fact that only three dozen investment banks can transact business directly with the Feds raises questions about propriety, since those banks can profit from advance knowledge of interest-rate shifts. With the mystery so thick, the public also can’t grasp the Fed’s real motivations. Few understand that its main aim is to maintain price stability and the value of the dollar.
A few reforms might shed some healthy light on the Fed. If the FOMC made its decisions public, it might eliminate suspicions of an insiders’edge. If it published minutes immediately, instead of releasing scrubbed excerpts six weeks later, the public might better fathom what the Fed is trying to accomplish. Several Fed governors are pushing such reforms. But like medieval churchmen, the majority clings to ritual, requiring the masses to respect what they do not understand.
