When the minutes of the Federal Reserve’s Aug. 7 Federal Open Market Committee (FOMC) meeting are released Aug. 28, Fed watchers will scrutinize them for insights into the thinking of committee members. However, FOMC minutes are sedate and selectively edited summaries of deliberations, leaving out flavorful items that markets and the media would savor. Unfortunately, and despite its advances in transparency, the Fed doesn’t release verbatim transcripts of meetings until five years later.
The most recent year for which transcripts of meetings and inter-meeting conference calls are available is 2001. That was a recession year, though the March cyclical peak and November trough dates were not officially determined until well after the recession was over. Though the Fed continued to lower the target federal funds rate as the economy weakened, it wasn’t until the recession was nearly over that the Fed realized the economy was in a recession. And at year-end, Fed staff forecasts weren’t anticipating a recovery until the second half of 2002, though in reality the recession was already over.
The year 2001 started with a telephone conference of FOMC members on Jan. 3. The federal funds target rate had been set at 6½ percent since the previous May, a rate Fed policymakers judged consistent with economic conditions at the time. But by the beginning of 2001, there were signs economic growth was slowing. In their conference call, FOMC members agreed with then Fed Chairman Alan Greenspan that the federal funds rate should be immediately lowered 50 basis points to 6 percent.
The chairman then instructed committee members on how they should deal with questions from the press, no-nonsense remarks not mentioned in the 2001 minutes of the meeting:
“The best position to take is to say ‘no comment’ or ‘I regret that I cannot answer your question’ or something equivalent. … Frankly, I don’t have a clue at this particular stage regarding exactly how we will come out at the next meeting. In the meantime, I hope we will try to maintain a high degree of reticence with the press — not a lack of friendliness, but a lack of information, if I may put it that way. … Years ago presumptions about what the Fed would or would not do didn’t have that much effect on the marketplace. Now we just whisper or open our mouths or smile or something and the markets go berserk.”
In his speeches, the chairman was a champion of Fed openness. Was he being inconsistent? Perhaps. But even so, were his hush-hush admonitions in the best interests of the economy? Given the risks at the time, probably, although there seems little justification to keep transcripts of FOMC meetings under wraps for five long years.
The federal funds rate was lowered another half-point in late January 2001. At the March 2001 FOMC meeting, with the economy continuing to weaken, Mr. Greenspan said: “I fear that with a reduction of 75 basis points or even 100 basis points today… stock prices could still fall, leading too many observers to conclude that monetary policy is ineffective. … If we do 50 points and stock prices fall further, as they well might today, it is the central bankers who may be perceived as intellectually inadequate, not policy itself. This is far less dangerous to the economy. … This is one of the rare periods when in my judgment calculated ambiguity can serve a useful purpose in minimizing unthoughtful activity.” The chairman proposed a 50 basis points cut in the funds rate to 5 percent, in which the committee concurred.
Did the chairman go too far in his desire to protect the image of the efficacy of Fed policy? Considering the circumstances, probably not. But his frank remarks are an eye-opener. When we read the transcripts of current FOMC meetings five years from now, I suspect we will find Chairman Bernanke’s remarks to be decidedly more circumspect.
The federal funds rate was reduced an additional 2½ points between March and October 2001. At the November meeting, when the committee shaved off a further half-point, the chairman expressed his annoyance with staff forecasts, remarks that won’t be found in the minutes: “We keep forecasting stabilization but there has been no evidence of it anywhere. We go from one Greenbook [staff forecast] to the next with a projection of rising economic activity, at least beyond the near term. And, indeed, by the processes we employ for forecasting, that conclusion is inevitable. … We are telling the model what to conclude by the way we have built it.”
Ouch. The chairman was really not exposing the limitations of staff economists, who are highly competent, but rather the limitations and uncertainty inherent in economic forecasting. In his frustration, he came down too hard on models.
And it’s not as if his own judgmental forecasts were error-free. For example, he is quoted in the December 2001 FOMC meeting transcript: “If I knew for certain that the economy was going to be moving up in the second half of 2002 as in the Greenbook, I would say it would be a grave mistake at this point to move the rate down. … I do think that the weight of evidence at this stage suggests that the best solution is in fact to move down 25 basis points and stay asymmetric to the downside.” The funds rate was reduced a quarter point to 13/4 percent.
In fact, the recession was already over as the chairman was speaking, with the economy starting an upward trend. At another point in the same meeting, the chairman quite appropriately conceded: “I don’t deny that our history — that is, the Federal Reserve’s history — is one in which we’ve typically moved at least once more often than we probably should have on both ends of the cycle.”
Yes, we will have another recession down the road, and we probably won’t know it until we’re well into it. And the Fed may continue to fight the recession after it’s over. Fed policymakers suffer the same uncertainties as other bankers and economists, and they will again play at being psychologists, deciding what the rest of us should know about policy for our own good. And that’s not necessarily bad.
Alfred Tella is former Georgetown University research professor of economics.