Speech

That Mysterious FOMC TheEconomicClubofMemphis Memphis,Tennessee December3,1998 The FOMC is one of the most closely ReserveBankpresidentsareappointed watched institutions in the United throughadifferentprocess.Eachofthe12Reserve States,andindeedintheworld.Articles Bankshasaboardofdirectorswithpowerssimilar onmonetarypolicyortheFOMCmem- tothoseofaregularcorporateboard.Eachboard bers appear in the Wall Street Journal almost ofdirectorshasthepowerandresponsibilityto everyday.Othernewspapersalsoreportonmone- appointthepresidentofitsReserveBank,although tary policy issues several times a week. Yet, as theappointmentissubjecttoconfirmationby I talk with people about the FOMC, I find that theBoardofGovernors.Firstvicepresidentsof they often regard the institution as somewhat ReserveBanksarebackupsforpresidentsatFOMC mysterious. My purpose tonight is to dispel the meetings,andaresimilarlychosen.Letmeexplain mystery. theprocessbyrecountingmyownappointment. Iwilladdresssixquestions.HowaretheFed Sometimeduringthefalloflastyear,my andtheFOMCorganized?Wheredothesefolks predecessor,TomMelzer,informedtheSt.Louis comefrom?WhathappensatanFOMCmeeting? boardofdirectorsthatheintendedtoleavethe DoestheFOMCknowmorethananyoneelse? BankbytheendofJanuary1998.Theboard HowdoestheFOMCspreadtheword?Finally, selectedasearchcommittee,whichfolloweda istheFOMCreallythatmysterious?AfterIfinish, processsimilartothatfollowedbyanylargecor- Ihopeyouwillposeadditionalquestions. poration.Thesearchcommitteeconsidereda widerangeofcandidates.WhenIwascontacted aboutmypossibleinterestinearlyDecemberof HOW ARE THE FED AND THE lastyear,Iconsultedwithmywifeanddecided thatIwasindeedinterestedinthrowingmyhat FOMC ORGANIZED? intothering.Afterseveralroundsofinterviews— TheFederalReserveSystemconsistsofthe includingadayofinterviewsinWashington BoardofGovernorsinWashington,D.C.,and12 witheachmemberoftheBoardofGovernors— FederalReserveBanks.ThesevenBoardmembers theSt.Louisboardofdirectorsselectedmeas serve14-yearterms.Amemberispermittedto president,subjecttoapprovalbytheBoardof serveonlyonecompleteterm;however,amember GovernorsinWashington.TheBoardofGovernors servingapartialtermmaybereappointedandmay approvedmyappointmentasthepresidentof thenserveafull14-yearterm.Boardmembers theFederalReserveBankofSt.LouislastMarch. areappointedbythePresidentoftheUnited Normally,eachReserveBankpresidentis StatesandconfirmedbytheSenate.ThePresident appointedtoafive-yearterm.Inmycase,Iwas designatesoneofthesevenmembersoftheBoard appointedtotheremainingfouryearsoftheterm asthechairmanforafour-yeartermandalso thatPresidentMelzerhadbegun.Inpractice, namesavicechairman.Bothdesignationsare ReserveBankpresidentsareordinarilyreap- confirmedbytheSenate. pointedatthecompletionofafive-yearterm, 1 MONETARYPOLICYANDINFLATION withnolimitationonthenumberofterms.The properuseofawiderangeofanalyses.Thecurrent boardofdirectorshasthepower,asdoesanycor- FOMCincludessomememberswhoasacademics porateboard,todismissthepresidentatanytime. havespenttheircareersstudyingmonetaryeco- TheFederalOpenMarketCommitteeisthe nomics.SeveralothermemberswithPh.D.shave mainmonetarypolicymakingbodyoftheFederal spentmanyyearsinthebankingindustryasmar- ReserveSystem.TheFOMCconsistsoftheseven ketanalystsandFedwatchers.Othershaveless membersoftheBoardofGovernorsandfiveof experiencewithmonitoringandstudyingFederal the12ReserveBankpresidents.Thepresidentof Reservepolicy,buttheirbusinessbackgrounds theFederalReserveBankofNewYorkisalways bringatremendousdepthofknowledgethatan avotingmember,andtheother11presidentsvote academicPh.D.,suchasmyself,maynothave. onarotatingbasis.Forexample,theFederal Stillotherswithbackgroundsinpublicservice ReserveBanksofSt.Louis,AtlantaandDallas bringdetailedknowledgeofgovernmentandfiscal areinoneoftherotationgroups.Thisyearwas issuestothetable. theturnfortheSt.LouisFedpresidenttovote, Insum,ImustsaythatIhaveanextraordinar- ilygiftedgroupofcolleagues.Theyareremarkable whichmeansthatIhavebeenavotingFOMC bothintheknowledgetheybringtomonetary member.Myfinalvotethisyearwillbecastina policydebatesandinthehighqualityofanalysis coupleofweeksattheDecemberFOMCmeeting. theyprovide.Ibelievethattheappointment Althoughonlyfiveofthe12ReserveBank processesfortheBoardofGovernorsandthe presidentsarevotingmembersatanygiventime, ReserveBankpresidencieshaveovertimeyielded all12presidentsattendeveryFOMCmeetingand astrongerandstrongersetofindividualsonthe participatefullyinthediscussionanddebate. FOMC. Thus,influenceovermonetarypolicythrough analysisandargumentationisavailabletoevery ReserveBankpresidentateverymeeting. WHAT HAPPENS AT FOMC MEETINGS? WHERE DO THESE FOLKS COME TheFOMCmeetseighttimesayear,orabout FROM? everysixweeks.Eachofusarrivesatthemeeting withathoroughbriefingbyourownstaffanda Ihaveoutlinedtheappointmentprocessfor largepileofbriefingmaterialputtogetherbythe membersoftheBoardofGovernorsandReserve staffattheBoardofGovernors.TheChairman Bankpresidents.Theirprofessionalbackgrounds varywidely.Most—althoughcertainlynotall— callsthemeetingtoorderpromptlyat9a.m.The havePh.D.sineconomics.Some,likemyself, firstitemofbusinessisapprovaloftheminutes haveacademicbackgrounds.Otherscomefrom ofthepreviousmeeting.Nextcomesareviewof thebankingindustry,andsomefromnonbanking domesticandinternationalmarketoperationsby linesofbusiness.Stillothershaveworkedtheir themanageroftheOpenMarket“Desk”atthe wayupthroughtheranksoftheFederalReserve FederalReserveBankofNewYork.TheOpen Systemorservedingovernmentpositions.Ifyou MarketDeskistheoperatingarmoftheFOMC; areinterestedinthebackgroundsofthecurrent theDeskimplementsFOMCpolicydecisionsby FOMCmembers,youcanfindtheirbiosatthe buyingandsellinggovernmentsecurities.After websitemaintainedbytheBoardofGovernors reportingonopenmarketoperations,themanager atwww.federalreserve.gov. usuallyanswersquestionsfromaroundthetable. ThediversityofbackgroundsontheFOMC FollowingtheDeskmanager’sreport,asenior isasourceofgreatstrengthformakingmonetary Boardstaffmemberprovidesanoverviewofthe policy.Successesinmonetarypolicydependon stateoftheeconomyandthestaff’sbest“guess” collatingawiderangeofinformationandmaking ontheeconomicforecast.Isay“guess”because 2 ThatMysteriousFOMC forecastingisanimperfectart.Everyforecasthas DOES THE FOMC KNOW MORE arangeofuncertaintyaroundit,andonsome THAN ANYONE ELSE? occasionstheuncertaintiesarequitesubstantial. Thestaffpresentationisfollowedbyadditional IhaveemphasizedthattheFOMCisagroup discussionwithquestionsandcommentsfrom ofhighlyqualifiedpeople.However,itisfairto theFOMCmembersandrepliesbystaffexperts. saythatmostoftheinformationuponwhichthe Nextcomesago-aroundinwhicheach FOMCactsisgenerallyavailabletoallanalysts, ReserveBankpresidentandeachmemberofthe bothinsideandoutsidethegovernment.System- BoardofGovernorsprovidesasummaryofhisor aticeconomicdata,suchastheunemployment herviewsonthestateoftheeconomy.Presidents rate,employment,housingstarts,GDPandso typicallyprovideinformationoneconomiccon- forth,areallavailabletoanyinterestedobserver. ditionsintheirownDistricts,commentingon TheFOMCasabodydoesnotobtainthisinfor- specialconsiderationsthatmightbearonthe mationaheadoftheworldatlarge,althoughthe nationaloutlook. Chairmangetssomeinformationafewhours Followingthereviewofeconomicconditions aheadoftherestofus.Forexample,theBureauof isanothergo-around,thistimeonthepolicyout- LaborStatisticsreleasestheunemploymentrate look.ChairmanGreenspankicksoffthepolicy foraparticularmonthonthefirstFridayofthe discussionbydetailinghisinterpretationofwhat followingmonth.Thereleasetimeis8:30a.m. thestatisticaldatameanfortheeconomicoutlook. ET.Theafternoonbeforetherelease—ordinarily Hewrapsupthisdiscussionbyindicatinghis lateintheday—theBLSnotifiesthechairmanof viewonpolicyandmakingclearhisrecommen- theCouncilofEconomicAdvisers.TheCEA dationastowhataction,ifany,theFOMCshould chairmanthenwritesashortmemowiththe take.ThepresidentsandBoardmembersthen informationtothePresidentoftheUnitedStates, outlinethemajorpolicyconsiderationsasthey thesecretaryoftheTreasuryandtheFederal seethemandindicatethepolicystancetheythink ReserveBoardChairman.Thus,theFedChairman isappropriateatthetime.Inrecentyears,the receivestheinformationapproximately12to15 policydecisionhasfocusedontheintendedlevel, hoursaheadoftheofficialrelease. ortarget,forthefederalfundsrate. TheFederalReservedoeshavealargeand Finally,theChairmanhastheFOMCsecretary talentedstaffthatisunmatchedintheprivate calltherollofthevotingmembersandeachvotes sector.IftheFedhasaninformationadvantage, “yes”or“no”onthepolicydirective.Thepolicy itisbecausethestaffisabletoconductthorough directive,whenadoptedbymajorityvote,then analysesofalltheavailabledataanddistillfrom providestheinstructionsfortheOpenMarket themabetterunderstandingofthecurrentstate DeskattheFederalReserveBankofNewYork oftheeconomyanditsprobableevolutionover untilthenextFOMCmeeting. comingquarters.Still,Ibelievethatitiscorrect Whenthemeetingends,typicallyaround tosaythattheFederalReserveoperatesonessen- 2p.m.,theCommitteereleasesashortwritten tiallythesameinformationbaseasoutside statementtothepress.Currentpracticeistopro- experts.Infact,carefulstudyoftheaccuracyof videabriefexplanationforanychangeinthe FederalReserveeconomicforecastssuggeststhat targetforthefederalfundsrate.WhentheCom- theseforecastsarenotnotablymoreaccuratethan mitteevotestokeepthetargetrateunchanged,a thoseofleadingcommercialforecasters. representativeoftheCommitteesimplymakesan Itisalsoworthnotingthatthedebateswithin oralstatementtothepress.Thisstatementsays theFederalReserveareessentiallythesameas thatthemeetinghasendedandtherewillbeno thedebatesamongpolicyexpertsoutsidetheFed. announcement.Storiesaboutthepolicyaction, Giventhateveryonehasessentiallythesame orlackthereof,quicklyappearonthewireserv- information,hasstudiedthesametheoriesand ices,andthemarketrespondsthatveryafternoon. readthesamearticlesintheprofessionaljournals, 3 MONETARYPOLICYANDINFLATION andhasobservedthesameeventsinthemarkets, icyinnumerousways.Themostformalofthese itistobeexpectedthatthedebatesinsideand aretheFebruaryandJunecongressionalhear- outsidetheFedarelargelythesame.Although ingsonmonetarypolicyatwhichtheChairman FOMCmembersdonottalkaboutameetingwith reportstoCongress.MemberoftheBoardof thosewhodonothaveFOMCclearance,itis Governorsalsotestifyatotherhearingsonmone- alwaysasafeguessthatthedebatesontheinside tarypolicyandavarietyofothersubjects.Their arelargelythesameasthoseontheoutside.Any- formalstatementsandthequestionandanswer onewhofollowstheWallStreetJournal,NewYork periodsconveyagreatdealofinformationabout Times,WashingtonPost,aswellasvariousmarket monetarypolicy.Inaddition,Boardmembers newsletters,willhaveaverygoodsenseasto andReserveBankpresidentsgivenumerous whatagivenpolicydebateisabout. speechesandmeetroutinelywithbankers,busi- nesspeopleandcommunitygroups,amongothers. FederalReservepublicationsandwebsitespro- HOW DOES THE FOMC SPREAD videanothersourceofinformation.Anyonewho THE WORD? hasaseriousinterestinmonetarypolicycanfind anampleamountofmaterial—writtenforpeople Asalreadynoted,theFOMCissuesabrief ofalleducationallevels. statementattheconclusionofeachFOMCmeet- Forexample,inOctoberIgavefourspeeches— ing.Twodaysafterameeting,theCommittee onsimilarsubjects,buttodifferentaudiences. releasesminutesofthepreviousmeeting.For OnOctober2,Ispoketo65highschoolstudents example,aftertheNovember17meeting,the abouttheimportanceofstudyingeconomics.Later Committeereleasedabriefstatementreporting inthemonth,whenIspoketobusinessleaders boththatithadvotedtoreducethetargetforthe inSt.LouisandtheninLouisville,Ipresented federalfundsrateto4¾percentandwhyithad myviewaboutwhathadhappenedinthecredit doneso.Twodayslater,onNovember19,the marketssincemid-Augustandhowthoseevents Committeereleasedtheminutesofitsprevious mightimpacttheU.S.economyoverthelong meeting,whichwasheldonSeptember29,and run.InOctober,IalsospokeinWashingtonata areportonitsOctober15conferencecall.These researchconferencesponsoredbyCATO.That minutesdonotattributeparticularpositionsto namedindividuals,buttheydoprovideanaccu- speechwasascholarlydiscussionofwhyIbelieve ratesenseofthenatureofthedebateatthe aninflationrateofzeroisbetterthanmoderate meeting.Anyinformationobtainedunderan inflation.Thenewsmediawereinvitedtoall understandingofconfidentialityisnotdisclosed. theseeventsandthreeofthespeechesareavail- SuchinformationcancometotheFOMCfrom ableontheSt.LouisFed’swebsite. variousbusinesssourcesorfromforeigngovern- Bytheway,ifyouhavenotviewedourweb mentsorforeigncentralbanks. site,Isuggestyoucheckitout.Ithinkyouwill TheFOMCreleasesverbatimtranscriptsof finditisrichwithvaluableinformation.Andthe itsmeetingsonafive-yearlag.Thetranscripts St.Louissiteisn’tuniqueamongReserveBanks. identifyspeakersbyname.Theonlyinformation AlltheReserveBanksandtheirpresidents,as omittedfromthesetranscriptsisthatobtained wellastheBoardofGovernors,arecommittedto underapledgeorpracticeofconfidentiality. makinginformationeasilyavailable. AnyonewhobelievesthattheFOMCismysteri- ousshouldpickuponeoftheseannualvolumes forbedtimereading.Iwillguaranteethatifyou IS THE FOMC REALLY THAT read10yearsofthesetranscripts—ormaybejust MYSTERIOUS? oneofthem—allofthemysterywillbegone! Beyondtheminutesandtranscripts,the OvertheyearsIhaveknownmanyFOMC FederalReservespreadsinformationonitspol- members.Icantellyouthattheyarehighlyqual- 4 ThatMysteriousFOMC ifiedandalsoquiteapproachableandaccessible. The“mystery”abouttheFOMC,Ithink,comes fromtheimportanceofitsresponsibilitiesand thecomplexityofmonetaryissues.Monetary policyisindeedcomplicated,asisnuclear physics.Ifindnuclearphysicspuzzling,ormys- terious,simplybecauseIdon’tunderstandmuch aboutit.Monetarypolicyisnotinherentlymys- terious,anymorethanisanyothersubject.Butit doestakeaconcertedeffortandaccumulationof knowledgeovertimetounderstandwhatthe monetarypolicydebatesareallabout. Oneoftheenjoyablethingsaboutthissubject matteristhatitispossibletogofarintoitwithout beingatrainedeconomist.Anditisalsotruethat apersonsuchasmyselfwhohasbeenfollowing monetarypolicyandmacroeconomicsforthe wholeofhisorherprofessionalcareercanstill findendlessfascinationwiththesubject.There ismuchthatwedonotknow,andtheeconomic worldisconstantlytossingsurprisesatus.Ifeel trulyfortunatetobesointimatelyinvolvedin thisresponsibility,beingpaidforsomethingthat issoexcitingandsomuchfuntome. AsIclosemyremarkstoday,IhopeIamleav- ingyouwithapositiveimpressionofanFOMC thatisverycapableandhighlycommitted.Ialso hopeyousensemyownpersonalenthusiasmand energy.AllofusintheFedareawarethatexercis- ingthepowertoprintmoneyisoneofthemost importantresponsibilitiesinoursociety.Indeed, giventhecentralroleoftheUnitedStatesinthe worldeconomy,U.S.monetarypolicyisoneof themostimportantresponsibilitiesintheworld. IwillnottrytotellyouthattheFedisinfallible. Wearenotomniscientandourforecastsarenot alwaysaccurate.Wearehumansandwedomake mistakes.ButIwilltellyouthatIandmycol- leaguesshareatotalcommitmenttopursuingthe mostsoundmonetarypolicyweknow—onethat willmaintainalowandstablerateofinflation andfostersafe,reliableandefficientbankingand paymentssystems.Thatisourcommitment,and weworkhardatit. 5

William Poole (1998, December 2). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19981203_poole

@misc{wtfs_speech_19981203_poole,
  author = {William Poole},
  title = {Speech},
  year = {1998},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19981203_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}