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" h e a k 'In g
BEFORE THE

COMMITTEE ON BANKING, FINANCE AND
llv
URBjftj AFFAIRS
HOUSE f REPRESENTATIVES

1
6
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ONE HUNDRED THIRD CONGRESS
FIRST SESSION

OCTOBER 19, 1993
Printed for the use of the Committee on Banking, Finance and Urban Affairs

Serial No. 103-78

U.S. GOVERNMENT PRINTING OFFICE
73-208 CC

WASHINGTON : 1994

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402




ISBN 0 - 1 6 -0 4 4 0 1 6 - 5

HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
HENRY B. GONZALEZ, Texas, Chairman
JAMES A. LEACH, Iowa
STEPHEN L. NEAL, North Carolina
JOHN J. LaFALCE, New York
BILL MCCOLLUM, Florida
BRUCE F. VENTO, Minnesota
MARGE ROUKEMA, New Jereey
CHARLES E. SCHUMER, New York
DOUG BEREUTER, Nebraska
BARNEY FRANK, Massachusetts
THOMAS J. RIDGE, Pennsylvania
PAUL E. KANJORSKI, Pennsylvania
TOBY ROTH, Wisconsin
JOSEPH P. KENNEDY II, Massachusetts
ALFRED A. (AL) McCANDLESS, California
FLOYD H. FLAKE, New York
RICHARD H. BAKER, Louisiana
KWEISI MFUME, Maryland
JIM NUSSLE, Iowa
MAXINE WATERS, California
CRAIG THOMAS, Wyoming
LARRY LAROCCO, Idaho
SAM JOHNSON, Texas
BILL ORTON, Utah
DEBORAH PRYCE, Ohio
JIM BACCHUS, Florida
JOHN LINDER, Georgia
HERBERT C. KLEIN, New Jersey
JOE KNOLLENBERG, Michigan
RICK LAZIO, New York
CAROLYN B. MALONEY, New York
PETER DEUTSCH, Florida
ROD GRAMS, Minnesota
LUIS V. GUTIERREZ, Illinois
SPENCER BACHUS, Alabama
BOBBY L. RUSH, Illinois
MIKE HUFFINGTON, California
MICHAEL CASTLE, Delaware
LUCILLE ROYBAL-ALLARD, California
THOMAS M. BARRETT, Wisconsin
PETER KING, New York
ELIZABETH FURSE, Oregon
BERNARD SANDERS, Vermont
NYDIA M. VELAZQUEZ, New York
ALBERT R. WYNN, Maryland
CLEO FIELDS, Louisiana
MELVIN WATT, North Carolina
MAURICE HINCHEY, New York
CALVIN M. DOOLEY, California
RON KLINK, Pennsylvania
ERIC FINGERHUT, Ohio




(II)

CONTENTS
Page

Hearing held on:
October 19, 1993 .........................................................................................
Appendix:
October 19, 1993 .........................................................................................

1
63

WITNESSES
Tuesday, October 19, 1993
Angell, Wayne, D., Governor, Federal Reserve Board .......................................
Boehne, Edward G., Jr., President, Federal Reserve Bank of Philadelphia......
Broaddus, J. Alfred, Jr., President, Federal Reserve Bank of Richmond ..........
Craven, Robert, Fixed Income Management Group..........................................
Greenspan, Hon. Alan, Chairman oT the Board of Governors of the Federal
Reserve Board and the Federal Open Market Committee; accompanied
by David W. Mullins, Jr., Governor, Federal Reserve Board; William J.
McDonough, Federal Reserve Bank of New York; and Robert T. Parry,
President, Federal Reserve Bank of San Francisco .......................................
Hoenig, Thomas M., President, Federal Reserve Bank of Kansas C ity............
Jordan, Jerry L., President, Federal Reserve Bank of Cleveland .....................
Keehn, Silas, President, Federal Reserve Bank of Chicago ..............................
Kelley, Edward W., Jr., Governor, Federal Reserve Board...............................
LaWare, John P., Governor, Federal Reserve Board .........................................
Lindsey, Lawrence B., Governor, Federal Reserve Board................ .................
McTeer, Robert D., President, Federal Reserve Bank of Dallas ........................
Meigs, James, Senior Vice President and Chief Economist, First Interstate
Bank Corp.......................................................................................................
Melzer, Thomas C., President, Federal Reserve Bank of St. Louis...................
Parry, Robert T., President, Federal Reserve Bank of San Francisco ..............
Phillips, Susan M., Governor, Federal Reserve Board ......................................
Schwartz, Anna, Research Associate, National Bureau of Economic Research .
Stern, Gary H., President, Federal Reserve Bank of Minneapolis ....................
Syron, Richard F., Federal Reserve Bank of Boston .........................................

12
19
20

54

8

22
23
24
13
15
16
25
50
27
28
18
47
29
31

APPENDIX
Prepared statements:
Gonzalez, Hon. Henry B...............................................................................
Fingerhut, Hon. Eric D................................................................................
Johnson, Hon. Sam .....................................................................................
Leach, Hon. James A...................................................................................
Roybal-Allard, Hon. Lucille ........................................................................
Angell, Wayne D..........................................................................................
Boehne, Edward G.......................................................................................
Broaddus, J. Alfred, Jr.................................................................................
Craven, Robert............................................................................................
Greenspan, Hon. Alan ................................................................................
Hoenig, Thomas M.......................................................................................
Jordan, Jerry L............................................................................................
Keehn, Silas ................................................................................................
Kelley, Edward W., Jr..................................................................................
LaWare, John P............................................................................................
Lindsey, Lawrence S....................................................................................
McDonough, William J.................................................................................
McTeer, Robert D.........................................................................................




(HI)

64
70
73
68

75
138
162
167
222

76
173
176
179
143
147
152
127
183

IV
Page

Prepared statements—Continued
Meigs, James...............................................................................................
Melzer, Thomas C.........................................................................................
Mullins, David W., Jr...................................................................................
Pany, Robert T.............................................................................................
Philfips, Susan M.........................................................................................
Stem, Gary H...............................................................................................
Schwartz, Anna J.........................................................................................
Syron, Richard F..........................................................................................

214
188
121
133
157
192
209
206

A d d it io n a l M a t e r ia l S u b m it t e d f o r t h e R e c o r d

Neal, Hon. Stephen L.: ......................................................................................
Mr. Gary Stern’s response to questions submitted by the Congressman ....
“Playing by The Rules, A Proposal for Federal Budget Reform,” Federal
Reserve Bank of Minneapolis, 1990 Annual Report ...............................




228
232

H.R. 28; FEDERAL RESERVE ACCOUNTABILITY
ACT OF 1993
TUESDAY, OCTOBER 19, 1993
H ouse of R epresen tatives ,
C ommittee on Ban kin g , F inance and U rban A ffairs ,

Washington, DC.
The committee met, pursuant to notice, at 10 a.m., in room 2128,
Rayburn House Office Building, Hon. Henry B. Gonzalez [chairman
of the committee] presiding.
Present: Chairman Gonzalez, Representatives Neal, LaFalce,
Roybal-Allard, Hinchey, Fingerhut, Leach, McCollum, Roukema,
Ridge, Roth, McCandless, Nussle, Johnson, Pryce, Knollenberg,
Lazio, and Huffington.
The Chairm an. The committee will please come to order.
Today, the Banking Committee begins the third day of hearings
on issues involved in the Federal Reserve System Accountability
Act of 1993, otherwise known as H.R. 28. I certainly welcome and
want to thank the Federal Reserve Chairman of the Board of Gov­
ernors, Mr. Greenspan, the Federal Reserve Governors, and the
presidents of the Federal Reserve Banks.
Chairman Greenspan testified at our last hearing last week that
everything proposed in our H.R. 28 was a, quote, major mistake,
end of quote. Today, we will hear additional testimony to see if our
proposals are needed reforms or major mistakes.
H.R. 28 requires that the Federal Open Market Committee: One,
announce changes in its policy 1 week after its meetings and that
it; two, make public a complete record of those meetings 60 days
after each meeting.
The central issue of today’s hearing is simple: Why is the Federal
Reserve, among all Federal agencies, exempt from keeping com­
plete and accurate records? If the White House, the Supreme
Court, the Defense Department, and every other government agen­
cy keep accurate records of what they are doing, why not the Fed­
eral Reserve? Are decisions by these parts of our government less
sensitive than those made at the Federal Reserve?
You distinguished gentlemen who serve as Federal Reserve presi­
dents did not have to present your credentials and your views to
the American public to secure your seats on the FOMC. President
Jordan has previously gone through the confirmation process for
his seat on the Reagan Council of Economic Advisors. I hope to­
day’s hearing will allow the citizens of our country to learn a little
bit more about you and how independent your views really are.




(l)

2

I would like each of you to tell me if you think the following in­
formation is of sufficient national importance to require recording
and publication of minutes of your FOMC meetings.
Last week at these hearings I cited FOMC minutes of two meet­
ings prior to the reelection of President Richard Nixon. Those min­
utes were released 5 years after the FOMC meetings. Although he
was warned that projections were for fast growth, Federal Reserve
Chairman Arthur Bums had called for even faster money growth
at these meetings. Why shouldn't the historical record reflect the
truth that Burns was pursuing an inflationary policy?
The importance of accurate minutes is reflected in the records of
a Philadelphia Federal Reserve Bank’s board of directors meeting.
The minutes reveal a possible coverup by the Federal Reserve re­
lated to the Watergate burglary in 1972. Recall the Watergate
scandal that began with the break-in of the Democratic National
Committee offices in the Watergate office building on June 17,
1972. A dangerous political crisis rocked our country while Con­
gress sought to uncover the facts.
As a matter of fact, this committee had original and first and pri­
mary responsibility in June 1972. I recall it vividly, as if it were
today. And the committee chairman, the Honorable Wright Patman, was frustrated because we had to have subpoenas, and we
had a solid block of the minority resisting, and all they had to do
was pick up three of our fellow Democrats, which they did, and we
were frustrated in that effort.
Judge Sirica was very much involved in that. What would have
happened if this committee had not been frustrated and we had
from the very beginning unraveled—I think even President Nixon
would have ended up better off. A dangerous political crisis did de­
velop, though, and I think we know the consequences today.
I read now from page 77 of the June 22, 1972, minutes of the
Philadelphia Bank’s board of directors meeting, and I am quoting:
“Mr. X reported that $6,300 in $100 bills had been found on the
persons arrested for breaking into the Democratic National Com­
mittee headquarters in Washington. The FBI came to this Bank
and said that 10 new 3-C notes, that is, $100 bills, numbered in
sequence were among those found. This Bank informed the FBI
that they were part of a shipment sent to the Girard Bank on April
3. Mr. X also said that the Washington Post had called to verify a
rumor that these bills were stolen from this Bank. The Post was
informed of the CV&D thefts but was told they involved old bills
that were ready for destruction.
“Mr. X said that Chairman Burns doesn’t want the System to get
involved and issued a directive to all Reserve banks on June 21
which said, in effect, that the System was cooperating with law en­
forcement agencies but should not disclose any information to
others.”
Three days earlier. Chairman Burns had written the following to
the Joint Economic Committee about rumors regarding the sources
of funds used to finance the Watergate burglars: “We at the Board
have no knowledge of the Federal Reserve Bank which issued those
particular notes or of the commercial bank to which they were
transferred. Without this information, there is nothing that we can
do to comply with your request.”




3

The apparent lie to the Washington Post reporter as a result of
the directives issues by the Chairman of the Federal Reserve mav
have been part of a coverup of important information by the Fed­
eral Reserve. Did the Federal Reserve ever inform the U.S. Con­
gress about these bills it had traced that were found on the Water­
gate burglars? If the answer is no, it appears that the Federal Re­
serve blocked the public and the Congress from a significant part
of the investigation of the financing of the Watergate burglars.
The Acting Director of the FBI, who may have been given the in­
formation, testified that he burned some Watergate files. The
Nixon administration asked him to limit the FBI’s investigation of
the burglars1 financing on the grounds that further inquiiy would
“uncover CIA assets and sources.” Gosh, that sounds familiar.
What was the Federal Reserve’s role in this coverup? Did the Fed­
eral Reserve deliberately obstruct the Congress and the public?
If we only had a formal directive giving the extremely truncated
version of these meetings, as the FOMC publishes today, there
would not be a historical record of these events. The American pub­
lic and the Congress are not the barbarians at your gates. These
are the people whom you are supposed to be serving.
Our expert witnesses testifying today will tell you that, contrary
to what Chairman Greenspan testified about at our last hearing,
accurate information does not undermine markets. Partial informa­
tion and leaked information undermines market efficiency.
I want to highlight the astounding claim in Dr. Anna Schwartz’
testimony, and I quote: “The Wall Street Journal has reported the
contents of the directive within a week of each of 11 out of 34
FOMC meetings that were held between March, 1989, and May,
1993.” Since substantial information is already coming out in
leaked form, why should we pretend that it is a closely guarded se­
cret? We need a straightforward record with complete and accurate
information.
Some claim we have all the information necessary in the formal
directive that is issued 5 or 6 weeks after each FOMC meeting.
That directive is sometimes called “minutes.” However, the FOMC
directive is far from a complete record, and it is equivalent to the
kind of information we would get if the Supreme Court only an­
nounced its decisions and not its opinions. Although the directive
does contain the FOMC vote, those who understand the Federal
Reserve know the objective in any FOMC meeting is to get a unan­
imous final vote regardless of any underlying disagreement.
Publishing only the final vote at FOMC meetings is little more
information than could be obtained from the Congress if we issued
only the vote on adjournment and none of the discussion. In order
to obtain a record that establishes individual accountability, there
must be a more detailed record. Most of the so-called minutes the
Federal Reserve now issues are boilerplate reports on the economy
that anyone could copy out of government and newspaper reports.
In 1976, the FOMC members arbitrarily announced that they
had stopped taking minutes of their meetings. In response to his
inquiries, Congressman Steve Neal, our ranking majority Member,
investigated and reported that among the 55 individuals who op­
posed the FOMC’s decision to stop taking minutes were 4 former




4

Federal Reserve Governors and 2 former presidents of Federal Re­
serve Banks.
One of the strongest letters was from Jerry L. Jordan, formerly
an official at the Federal Reserve Bank of St. Louis, here today as
president of the Federal Reserve Bank of Cleveland. His letter of
October 21, 1976, said, and I quote from him: “As an economist in
the Federal Reserve for over 8 years, I found the memoranda of
discussion”—that is the name of the minutes—“to be extremely
useful. Even when I attended FOMC meetings I always reviewed
the memoranda of previous meetings as part of the preparation for
the next meeting.”
The President of the St. Louis Federal Reserve Bank was defi­
nitely influenced in a very positive way by the existence of a per­
manent record that would eventually be made public. It helped him
and his staff to maintain intellectual honesty, sometimes in the
face of great pressure to bend. He knew that even when his views
fell on deaf ears in a meeting, consistent analysis of the problem
and the recommendation of solutions would be in the record to be
viewed with historical perspective.
I want to know why minutes which were clearly helpful up until
1976 suddenly became harmful after 1976. I think it is a reason­
able question.
I understand the peculiar position of the distinguished presidents
of the Federal Reserve Banks who are testifying today. I under­
stand that, and I am extremely grateful for your presence. I think
that goodwill—and, obviously, certainly there is no political advan­
tage—should reflect the seriousness of the intent and motivation
and a clear attempt to discharge a prime responsibility that lays
upon us who want to be and claim to be representatives of the peo­
ple in that area that most affects their livelihoods.
I had thought that last week Chairman Greenspan would have
emphasized tnat you serve as independent coequals on the FOMC.
However, he contends that the ultimate defense against a bank
president is the power by the Board of Governors to remove that
person from office. I think this says a great deal about your inde­
pendence. Nevertheless, be that as it may, I hope our distinguished
witnesses will give their honest views today, as I am sure they will,
and that they will be perfectly frank while their comments are
being recorded. And I certainly look forward to your testimony.
[The prepared statement of Chairman Gonzalez can be found in
the appendix.]
The C hairm an. With that, I recognize Mr. Leach.
Mr. L each , I thank the distinguished chairman.
Today we hear from 10 presidents of the district banks and 5
Governors of the Federal Reserve Board. Given that these individ­
uals influence the allocation and expansion of credit through the
regulation of the banking industry, it is important to note in the
context of a hearing on reforming the Federal Reserve System that
the American public is served by individuals represented here of
distinctive quality and integrity. We welcome them in a spirit of
appreciation and trust.
And I personally would like to say, Mr. Chairman, I appreciate
your sense of history that you iust expounded. It should be clear
in the record that Watergate didn’t tar the reputation of any of the




5

individuals that we have before us, and that everybody is here vol­
untarily without any hint of misdoing or misdeeds. In fact, given
the brain trust we have before us, it makes me think it would be
very appropriate perhaps at some other time to invite all or part
of this group before the committee again. Given the regional eco­
nomic perspective that is here, it might be very helpful to the Con­
gress itself.
At the first two hearings, this committee gave deserved attention
to the fact that particular presidents are assigned public respon­
sibility on boards comprised of individuals not only from the pri­
vate sector but one element of it. In defense of this selection meth­
odology, the Federal Reserve System can properly point to a tradi­
tion of independence, quality, and political insulation. Neverthe­
less, there is an element of unseemliness inherent in a system in
which sectors of the public view their interest as distinct from the
banking sector and in particular when individuals are asked to reg­
ulate the industry while being accountable to boards of directors
controlled by members of that industry.
While I have a high regard for the current leadership of the Fed
and the direction it is currently moving on the regulatory front, it
is useful to point out three areas where the Federal Reserve Sys­
tem in the past has instituted discriminatory regulatory policies.
First, in the late 1970’s, early 1980’s, the Fed went along in be­
lieving that sovereign guarantees were ironclad because govern­
ments never go broke and imposed lesser regulation on LDC debt.
Second, the Fed has continued to assume that large banks need
less capital than smaller banks. Third, it has not required bad
loans of large banks to be written off to the same extent required
of small banks.
My view is that discriminatory regulation skews the financial
landscape and amounts to credit allocation. The irony in regulation
being too accommodating, if not cozy, with individual banks is that
management becomes misserved. For instance, New York money
center banks for decades have been on the cutting edge of wanting
to see liberalization of the Douglas amendment and McFadden Act
so they could branch interstate. When interstate barriers started to
fall, without congressional modification of these laws, many of
these banks were in no position to take advantage of it because
their capital had been so dramatically depleted. This was due, in
part, to lending mistakes which were in effect sanctioned by regu­
lators. If regulators, on a timely basis, had insisted on stronger
capital ratios for international lending, domestic as well as foreign,
these institutions would be larger ana stronger today.
It is instructive to note that Federal regulators, albeit a bit late,
forced the Bank of America to restructure and recapitalize approxi­
mately 5 years before they served comparable notice on the east
coast. Bank of America later credited regulator sternness with its
turnaround and the ability to launch an expansionary drive.
One of the lessons of the S&L debacle is that capital moves to­
ward industries which have the weakest regulation.
The problem of regulator-driven deposit skewing was most evi­
dent in the 1980’s in the thrift industiy when institutions were al­
lowed to leverage minimal and in some cases nonexistent capital
bases. It is a not inconsequential problem today. The more atten-




6

tion given to risk weighting assets, the less reliance Federal bank
regulators are putting on the leverage ratio. Overreliance on riskbased capital standards without use of an adequate ratio leads to
competitive inequities in deposit seeking and de facto credit alloca­
tion of those deposits. The fact that State bank regulators rely
more on leverage ratios means that deposits will flow to national
banks rather than State banks, to money center institutions rather
than community banks, to bond buying instead of entrepreneurial
lending.
Regulatory agencies have a vested interest in the competitive vi­
tality of the institutions they regulate. Hence, if the Fed wants to
keep, which I support, a major regulatory function, it must be care­
ful to ensure that conflicts, perceived or otherwise, do not exist,
that regional inequities are not allowed to develop, and advantages
are not provided one kind of institution over another.
As mentioned earlier, one of the lessons of the S&L crisis was
that disparity in regulations skews capital flows. Another was the
conclusion by Congress that it had been a mistake to allow the 12
district banks in the Federal Home Loan Bank System, with boards
comprised of representatives from regulated institutions, a prin­
cipal role in the regulatory process. As part of the cleanup, Con­
gress abolished the regulatory function of the Federal Home Loan
Bank System and transferred them to an office which has its direc­
tor publicly appointed.
As we consider regulatory consolidation, there is a case for and
against providing continuation of regulatory responsibility for the
Federal Reserve System. But if it is to be preserved—and I would
stress again I support that prospect—an institutional arrangement
must be established which gives no hint of self-regulation, of the
fox guarding the foxes. In a country in which process is our most
important product, it simply is unacceptable for regulators to be ac­
countable to boards which, in turn, are controlled by the regulated.
I look forward today to the testimony of the witnesses.
[The prepared statement of Mr. Leach can be found in the appen­
dix.]
The C hairm an. The Chair will recognize Mr. Neal. He is our
ranking Member on the majority side and also chairman of the fun­
damental Subcommittee on Financial Institutions. Thank you.
Mr. N e a l . Thank you, sir, very much.

I would like to say briefly, first of all, it is entirely appropriate
for the Banking Committee to hold hearings looking into any and
every area of its jurisdiction. It is entirely appropriate for us to
continue to examine the underpinnings of our system, eveiy aspect
of the underpinnings of our system, to constantly try to find ways
to do better what it is we try to do.
So I certainly have no objection to our examining the Fed’s regu­
latory structure, the open market operations, every aspect of it. In
fact, I think it is very healthy. I think that certainly nothing
should be set in stone forever, and that it is very healthy to con­
tinue to look at the way we do things.
Having said that, I must say it is also a little strange to me that
we are devoting a lot of time to the Fed, especially the Fed’s open
market operations, at this time because it seems to me that those




7

operations have been very successful, and there has not been a hint
of scandal ever.
The Fed’s—the most important role, of course, is controlling in­
flation in the Open Market Committee, which has that responsibil­
ity, has done that job very well over recent years, in fact, extraor­
dinarily well under the most difficult circumstances. And every citi­
zen of this country really should be thankful to this group for the
current situation. I am talking especially about the fact that young
couples now can borrow at the lowest mortgage rates in memory,
that banks are lowering the prime rates to the lowest rates in
many years, that really the whole banking structure has been
strengthened, in fact, saved, by low inflation, low interest rates.
The stock market is strong because of low inflation, low interest
rates.
So the healthiest aspect of our economy is directly attributable
to the fact that this institution has worked well, that it has done
its job very, very well. Every American, most importantly the work­
ing people of America, the people who must borrow, not the rich
people who can handle their finances under all circumstances but
the average guy out trying to make it from paycheck to paycheck,
is the main beneficiary of this policy that has lowered interest
rates and lowered inflation.
So I do find it a little strange that we are examining the Fed.
But, in any case, it is an important subject, and if there is any
problem, we ought to uncover it and deal with it.
Just one more point I would like to make. I hope you all, in your
testimony this morning, will try to relate the policies that we are
examining, the idea of revealing minutes and auditing the Open
Market Committee and the other suggestions that are contained in
this legislation and in other legislation to your policy.
Somehow, so far, it seems these hearings have considered process
divorced from policy. And, frankly, if we were to look at sort of a
good government model and that were all we were looking at, we
might say, yes, it would be nice to know every word that was spo­
ken and know it that day and maybe show it on the evening news
and so on, audit the Open Market Committee and so on. But the
fact is that those considerations are not divorced firom policy. And
the only reason we want an independent Fed is so the Fed can
work for the long-term benefit of this country, even in light of the
short-term political pressures that would be there were there not
the independence.
So I think that point hasn't quite been made when we have
talked about how it would be a good idea for every comment made
by every person when discussing monetary policy to be made pub­
lic. It is not a good idea because we want be free, open discussion
devoid of political pressure. Because that can help lead to a policy
that is best for our people.
When we talk about auditing the Open Market Committee, the
reason we don't want to audit the Open Market Committee is we
don’t want to second-guess and impose a short-term political pres­
sure on the committee that is trying to take a long-term view in
the interest of our people.
So, anyway, Mr. Chairman, I appreciate the opportunity to say
a few words. I am glad you are holding the hearing. I hope we will




8

just introduce the policy consideration here as it affects these poli­
cies that these so-called reforms are talking about. I think it will
become clearer why we wouldn’t want to pass this bill.
I thank the distinguished chairman.
The C h a ir m a n . I ask unanimous consent that all members have
an opportunity to place in the record in writing any preliminaiy
statement they wisn to have appear in the transcript of the pro­
ceedings. And being that we have such numerous witnesses, we
will try to hurry on expeditiously.
[The prepared statements referred to can be found in the
appendix.]
We will recognize Chairman Greenspan, of course, first. The
Chairman has asked for at least 15 minutes.
We will be prepared to place in the record all of the written testi­
mony that has been submitted to us by the diverse presidents and
directors and then ask that your oral presentation be as brief as
possible following Chairman Greenspan.
Mr. Chairman.
STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE BOARD
AND THE FEDERAL OPEN MARKET COMMITTEE; ACCOM­
PANIED BY DAVID W. MULLINS, JR., GOVERNOR, FEDERAL
RESERVE BOARD; WILLIAM J. McDONOUGH, PRESIDENT,
FEDERAL RESERVE BANK OF NEW YORK; AND ROBERT T.
PARRY, PRESIDENT, FEDERAL RESERVE BANK OF SAN
FRANCISCO

Mr. G r een spa n . Thank you very much, Mr. Chairman. I appre­
ciate the opportunity to appear before this committee and to pro­
vide my particular views on the appropriate degree of disclosure by
the Federal Open Market Committee.
In a democratic society, public policy decisions-----The C ha ir m an . Will you please yield to me for a moment?
Gentlemen, I hate to bother you, but Congressman Johnson has
reported that his view is obstructed. Is there any possible way you
can take a shot without obstructing his view?
Congressman, why don’t you sit up here?
Thank you, sir. Thank you, Mr. Chairman.
Mr. G r een spa n . Just to repeat, Mr. Chairman, it is important
that we recognize that in a democratic society public policy deci­
sions should be in the open, except where exposure impedes the
primary function assigned to an institution by law. Accordingly, the
Federal Reserve makes its decisions public immediately, except
when doing so could undercut the efficacy of policy or compromise
the integrity of the policy process.
What we do not disclose immediately are the implementing deci­
sions with respect to our open market operations. However, any
changes in our objectives in reserve markets are quickly and pub­
licly signaled by our open market operations. And we publish min­
utes of the policy deliberations and decisions from each FOMC
meeting shortly after the next regular meeting has taken place.
These minutes, a copy of which for the meeting of February 1993,
I have attached to the statement, can run from 15 to more than
30 pages, presenting a comprehensive record of the economic fac-




9

tors and analysis and alternative policy approaches considered in
reaching our decisions.
Nevertheless, the Federal Reserve, like other central banks, has
a reputation of being secretive. I suspect this is largely a result of
the nature of a central bank’s mission. The operations of central
banks have a direct impact on financial and foreign exchange mar­
kets; therefore, these institutions often find themselves in the posi­
tion where complete openness and disclosure could regrettably in­
hibit or even thwart the implementation of their public purpose.
It is often the case that the FOMC expresses a predisposition to­
ward a policy change in its directive to the Open Market Desk.
Such a predisposition, for example, toward easing, implies that the
FOMC is more concerned about developments that would dictate
an easing of policy rather than a tightening, and therefore wants
to respond relatively promptly to information suggesting the need
for such action.
We often express this predisposition without any change in in­
strument settings in fact resulting. In such circumstances, the re­
lease of those directives during the period they are in force would
only add to fluctuations in financial markets, moving rates when
no immediate change was intended.
As a consequence, a disclosure requirement would impair the
usefulness of the directives, as committee members, concerned
about the announcement effect of a directive biased either toward
ease or tightening, would tend to shy away from anything but a
vote of immediate change or of no change at the meeting. An im­
portant element of flexibility in the current procedures would be
lost, which can scarcely serve the public interest. Immediate disclo­
sure of the directive would change the nature of monetary policy­
making, and it would not be a change for the better.
Holding open meetings of the FOMC or releasing a videotape,
audio tape, or transcript of them would so seriously constrain the
process of formulating policy as to render those meetings nearly
unproductive.
A number of important items currently discussed at FOMC meet­
ings simply could not be mentioned in open forum. We would no
longer have the benefit of sensitive information from foreign
central banks and other official institutions or of proprietary infor­
mation from private sector sources, as we could not risk the publi­
cation of information given us in confidence.
Moreover, to avoid creating unnecessary volatility in financial
and foreign exchange markets, the FOMC might have to forego ex­
plorations of the full range of policy options. Even a lag in releas­
ing a verbatim record of the meetings would not eliminate this
problem but only attenuate it.
Mr. Chairman, let me take a moment to describe more fully the
process followed at FOMC meetings to reach decisions on monetary
policy. After staff presentations of recent developments and emerg­
ing economic trends, a roundtable discussion of all 19 participants
begins. The Reserve bank presidents describe conditions and devel­
opments within their districts, and both they and the members of
the Board of Governors go on to evaluate the outlook for the U.S.
economy as a whole.




10

All members bring in, where relevant, international economic
and financial considerations. In light of this discussion, we then
consider whether the stance of monetary policy needs to be ad­
justed, either immediately, or possibly in the fixture under particu­
lar circumstances.
A considerable amount of free discussion and probing Questioning
by the participants of each other and of key FOMC staff members
takes place. In the wide-ranging debate, new ideas are often tested,
many of which are rejected. Ideas initiated by one participant are
frequently built upon by others.
The prevailing views of many participants change as evidence
and insights emerge. This process has proven to be a very effective
procedure for gaining a consensus around which a directive to the
Open Market Desk can be crafted. It could not function effectively
if participants had to be concerned that their half-thought-through,
but nonetheless potentially valuable, notions would soon be made
public.
I fear in such a situation the public record would be a sterile set
of bland pronouncements scarcely capturing the necessary debates
which are required of monetary policymaking. A tendency would
arise for one-on-one premeeting discussions, with public meetings
merely announcing already agreed-upon positions or for each par­
ticipant to enter the meeting with a final position not subject to the
views of others. Such a record would be far less informative than
the minutes we currently publish.
In both the Freedom of Information Act and the Government in
the Sunshine Act, Congress explicitly recognized that there were
types of information ana kinds of meetings that should be protected
from dissemination to the public. Certain exemptions have been
provided in FOIA for information that, for example, is of a con­
fidential financial nature and in the Sunshine Act for meetings
that would prompt speculation in financial markets.
In the various exempted areas it was determined that release of
information would not be in the public interest. For similar rea­
sons, I believe that the consequences of requiring prompt release
of a verbatim record of FOMC meetings would most certainly not
be in the Nation’s best interest.
Mr. Chairman, in your letter of invitation to this hearing, you
also posed several specific questions related to the maintenance of
notes or records of FOMC meetings and to the premature release
of FOMC information. I would like to turn now to the answers to
those three questions.
At FOMC meetings, I take very brief, rough notes on the views
expressed by participants. These notes assist me in keeping track
of committee sentiment as the meeting progresses and thus in
judging where a consensus may be reached with respect to mone­
tary policy. After the meeting, the notes are kept in a locked file
cabinet along with other FOMC materials.
Others attending the FOMC meetings may also be taking notes,
and I am sure they will tell you about them in their own responses.
I have suggested to the Reserve bank presidents that they respond
to your questions regarding whatever records may be kept at their
own banks; I will cover records made by the Board staff and, in
particular, by the FOMC secretariat.




11

Some individual members of the Board staff take handwritten
notes and retain them to help them in discharging their respon­
sibilities. The meetings are reported electronically by the FOMC
secretariat. These audio tapes are used to assist in the preparation
of the minutes that are released to the public following the subse­
quent meeting. Thereafter, the tapes are recorded over.
In the process of putting together the minutes, an unedited tran­
script is prepared from the tapes, as are detailed notes on selected
topics discussed in the course of the meeting. These materials gen­
erally are seen only by the staff involved in preparing the minutes,
and the documents are kept under lock and key by the FOMC
secretariat.
With regard to your final query on the release of information
about FOMC meetings, I would again state my strong view that
any unauthorized release of FOMC decisions is a very serious mat­
ter. Leaks of FOMC proceedings are clearly unfair to the public, po­
tentially disruptive of the policymaking process, and undoubtedly
destructive of public confidence in the Federal Reserve.
Any leaks tnat may have occurred were most assuredly not or­
chestrated or directed by the FOMC. A deliberate premature leak
of information is repugnant. Our current policies that call for de­
layed release of information are in place for good reasons, as I indi­
cated previously. They are grounded on the assumption of confiden­
tiality; leaks undermine these policies.
I suspect that, to an extent, what appear to be deliberate leaks
may instead represent something quite different. In some cases,
FOMC participants who speak to the press may believe they have
revealed nothing about recent monetary policy decisions, but they
may in fact have inadvertently provided enough of a sense of the
policy considerations to allow conclusions to be drawn, especially
for experienced reporters speaking to several sources. This puts us
in a difficult situation. We should not reveal confidential informa­
tion about our decisions. At the same time, we cannot and should
not wall ourselves off entirely from the media; it is our obligation
to explain the broad considerations that motivate monetary policy,
to correct certain misimpressions, and to convey as much informa­
tion as possible, without unsettling markets, creating inequities, or
violating the trust of our colleagues.
The FOMC has discussed this issue extensively, and we have
taken several steps that we believe will curb any further unauthor­
ized release of information. We have reemphasized the necessity of
avoiding contact with the press during the periods surrounding
FOMC meetings and of caution at other times. Moreover, it has
been made clear that any future leak from an FOMC meeting will
be followed up very aggressively—by a full investigation that will
include gathering sworn statements from all attendees.
In response to your request as to whether I personally played a
part in past leaks of FOMC information, I can assure you, Mr.
Chairman, that I have never knowingly released to the press or to
other members of the public any information about the results of
an FOMC meeting prior to the formal, scheduled release.
I would include one footnote to this statement, however: From
time to time, I have briefed members of various administrations
about the outcomes of FOMC meetings, because that knowledge




12

could assist them in the formulation of government policies for
which they have responsibility. This qualification has not, however,
been a relevant one over the past year or so, as the Federal Re­
serve has not altered its instrument settings.
I trust the problem of leaks is behind us. If I am wrong about
this, the FOMC’s policy on delayed disclosure of decisions will have
to be reevaluated. Should we have to change our policy as a result,
it would be unfortunate, for I firmly believe that a shift to prompt­
er disclosure of the substance of our deliberations will adversely af­
fect our discussions and decisions and therefore monetary policy it­
self.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Greenspan can be found in the
appendix.]
The Chairm an. We will recognize Governor Angell first. I under­
stand he has a time problem, and we have listed him here as first
to be recognized.
Governor Angell.
STATEMENT OF WAYNE D. ANGELL, GOVERNOR, FEDERAL
RESERVE BOARD

Mr. A n g e ll . Mr. Chairman and members of the committee, I ap­
preciate this opportunity to give you my views on the accountabil­
ity of monetary policy. My perspective is of one who throughout his
career as an elected ana appointed official has been in favor of
opening government proceedings to the public and the press. Our
democracy demands that the actions of its government be con­
ducted “in the sunshine” to the greatest extent possible. It also de­
mands that government agencies adopt the very best policies. In
some cases, there is a tradeoff between these two objectives.
Monetaiy policy is best formulated within a framework that pro­
vides an appropriate degree of insulation from day-to-day political
pressures while requiring full accountability.
The Board of Governors is required to report to the Congress on
its monetaiy policy plans and objectives twice each year. Federal
Reserve policymakers also testify as requested before this and
other congressional committees about monetary policy and other
matters of interest, including a detailed accounting of our expendi­
tures.
Beyond the statutory requirements, the Federal Reserve provides
significant additional information to the public about the conduct
of monetary policy. The Federal Open Market Committee publishes
minutes of its meetings. These minutes summarize fully the discus­
sion. Significant decisions taken by the FOMC should always be
made on the basis of recorded votes—in accord with an important
principle of accountability. Each member of the committee is af­
forded an opportunity to participate in the preparation of the min­
utes so that no individual or shared views are omitted. In my view,
the minutes present an accurate account of each FOMC meeting.
With regard to timeliness of the release of such minutes; as you
know they are published shortly after the following committee
meeting. It seems to me that sucn a lag is appropriate. The imme­
diate release of information on the committee’s plans for contin­
gencies could increase market volatility, particularly in cir­




13

cumstances when the contingencies do not eventuate. Such vola­
tility is unnecessary and could be especially counterproductive if
concerns about possible volatility deterred some members of the
Federal Open Market Committee from discussing such contin­
gencies or drove them to relying on implicit or behind-the-scenes
understandings. On balance, the market and the public are better
served by more detail and more openness with delayed publication
as compared with the realistic alternative of less specificity that
would likely accompany earlier publication.
Similarly, I believe that the provisions in H.R. 28 that would re­
quire release of videotapes or transcripts of committee meetings
would have deleterious consequences. In the context of monetary
policy, such provisions likely would cause policymakers to be less
willing to conjecture about future economic and financial develop­
ments, to explore alternate policies, or to challenge others’ views.
Under those conditions, discussions during FOMC meetings are
less likely to lead to appropriate policy decisions. The willingness
of individual members to explore verbally what may seem to be low
probability events may be the beginning of a new perspective that
elicits more careful watching and continued debate. The process of
developing a consensus view through an open contrarian forum is
essential if monetary policy is to lead toward monetary stability.
For these reasons, I believe that the relevant provisions of H.R.
28 would do little to make the monetary policy process more trans­
parent and, unfortunately, would do much to make the conduct of
monetary policy less effective. In my view, our current procedures
regarding disclosure are on the right track. They permit a careful
review of alternative policies while allowing the Congress and the
public to analyze both the process by which our decisions are
reached and their results.
My answers to your specific questions are included in my written
statement.
The Chairman. Thank you very much. As I said before, your full
prepared text will be in the record.
[The prepared statement of Mr. Angell can be found in the
appendix.]
Our next witness is Governor Kelley.
STATEMENT OF EDWARD W. KELLEY, JR., GOVERNOR,
FEDERAL RESERVE BOARD

Mr. K e lle y . Thank you, Mr. Chairman, and thank you for the
opportunity to present my views on H.R. 28.
Pursuant to the request in your letter of invitation, I shall first
answer, in order, the three specific questions posed therein and
then offer my perspectives on the bill in the area of maintaining
a record of the Federal Open Market Committee meetings.
First, I have generated rough pencil notes of my own thoughts
and summaries of the views of other members, as I understand
them, at most meetings. These notes reside in a locked file in my
office.
Second, I would assume various persons present at the meetings
prepare and keep notes and records of their own, certainly includ­
ing the FOMC secretariat, but I am unaware of specifically who




14

does what in that regard. Doubtless, others will report on their own
activities.
Finally, I have no information whatsoever about unauthorized or
premature release of FOMC information.
Let me move on to comment on H.R. 28 which would require,
among other things, complete release of FOMC meeting proceed­
ings within 60 days. I must respectfully oppose this proposal.
It seems to me that the issue here is the reconciliation of two
basic principles for conducting public business in a democracy. The
first is the obvious requirement that public policy be generated to
further the public interest in the soundest possible way. The second
is that the public has the right to know what its leaders are doing
in the conduct of its business, including how and why they are
doing it.
While these two principles can often be fully accommodated,
there are clear cases wherein the second, fully implemented, can
potentially degrade the first. In such cases, the overriding require­
ment is that public policy must be of the highest possible quality.
The meetings of the FOMC are such a case. In these meetings,
12 voting members, augmented by the 7 additional Reserve Bank
presidents, debate and decide important public matters of mone­
tary policy. To work well, such an arrangement must proceed in
private, where the participants may freely and easily exchange per­
spectives and confidential information, dispute, alter viewpoints,
and work toward the discovery of common ground. In this manner,
responsible public policy is created.
To expose this process to public scrutiny would, in my view, very
clearly introduce an atmosphere that would be detrimental to the
final result. The quality of the final result, sound monetary policy
to undergird and support our economy, is the most important of the
interests in question. I believe H.R. 28 would be counterproductive
in this respect.
The requirement remains that the public be as informed as pos­
sible in these matters and that those involved in the process be ac­
countable. I believe that the existing procedures for release of
FOMC decisions are responsive to the public’s right to be informed.
Concerning accountability, FOMC decisions are the result of the
votes of the participating members, and each participant's vote is
recorded and made public. Affirmative votes are explained in the
minutes as released, and dissenting votes are accompanied by indi­
vidual explanations. Thus, there is complete accountability for
results.
In summary, I feel that the public’s interest in this matter is best
served by maintaining a system wherein the process is confidential
and the policy results are made public in appropriate ways, with
personal and group accountability for such results.
Thank you, sir.
The Chairm an. Thank you.
[The prepared statement of Mr. Kelley can be found in the ap­
pendix.]
The C hairm an. Our next witness is our long-time friend, a man
who has spent a considerable number of minutes, maybe hours, be­
fore this committee, and we are grateful.
Governor LaWare.




15
STATEMENT OF JOHN P. LAWARE, GOVERNOR, FEDERAL
RESERVE BOARD

Mr. LaW are. Mr. Chairman and members of the committee, I
am here with my Federal Open Market Committee colleagues to
comment on the proposed requirements in H.R. 28 for full and
timely accounting of each FOMC meeting.
I would strongly urge the committee to continue, as in the past,
to concentrate its oversight efforts on the substance of monetary
policy rather than on the procedures by which it is determined. The
Humphrey-Hawkins testimony provides a full description of policy
moves, historic economic performance, and future objectives for pol­
icy. It is the fullest public accounting of monetary policy provided
by any central bank in the world.
I see no purpose in the publication of a verbatim transcript of the
Federal Open Market Committee’s deliberations and less purpose
in a videotape record of the proceedings. A verbatim transcript or
a videotape recording of the meetings of the Open Market Commit­
tee might significantly inhibit the members from the free exchange
of ideas which presently characterizes our meetings. We all have
a certain amount of self-consciousness about being on stage, as we
would certainly be under the suggested protocol, and the problem
would be aggravated by the knowledge that the matters under dis­
cussion are Highly sensitive for financial markets.
Consultation in camera, rather than on camera, gives the mem­
bers of the Open Market Committee the same privileges of open
communication and free exchange enioyed by juries. Importantly, it
also gives the committee members the same right to change their
minds as jurors enjoy. I am sure the quality of jury decisions would
be significantly changed if their deliberations were published. I am
equally sure the process of developing monetary policy would suffer
under a regime of public performance.
I am less concerned that the quality of policy decisions would be
adversely affected by a memorandum of discussion carefully edited
to delete market-sensitive information provided on a confidential
basis and released on some delayed schedule, perhaps 1 year after
the meeting it described.
The issue of the timely release of the directive for open market
operations is a difficult one. On the one hand, the market knows
at 11:30 or so the morning after the FOMC meetings whether there
has been a policy shift. Tnat is discernible from the way the Desk
at the New York Reserve Bank enters the market. From that per­
spective, there is little to be gained or lost from the publication of
FOMC decisions within a week, as proposed in H.R. 28.
On the other hand, immediate release would discourage the use
of asymmetric language because asymmetiy reflects the tilt of the
committee either toward ease or tightening. Markets might react
impulsively on such news, to no one’s best interest except specu­
lators. And, internally, such a stricture against asymmetric lan­
guage would inhibit quick intermeeting response to changing mar­
ket conditions.
As to the three specific questions raised: Number one, I make no
notes at FOMC meetings other than brief bullet points to outline
my own comments to assure coherence. These, together with all the
analytical materials supplied by the staff prior to the meeting, are




16

given by me to my executive assistant for destruction as soon as
the FOMC meeting adjourns.
Two, I have no knowledge of what notes or records are made by
or retained by other members of the committee.
Three, I have no knowledge of the source of the notorious leaks
of FOMC information. Such leaks are irresponsible and reprehen­
sible. If they are unintentional, they reflect a naivete which should
not be allowed to lurk anywhere near the FOMC. If they are inten­
tional, they should be punished to the full extent of whatever rem­
edies are available, no matter whom the culprit may be.
I appreciate the opportunity to participate in this hearing and
look forward to answering any further questions the committee
may have, Mr. Chairman.
The Chairm an. Thank you very much, Governor. Again, we
thank you for your prepared text that we had an opportunity to re­
view before the meeting.
[The prepared statement of Mr. LaWare can be found in the
appendix.]
The next witness is also our friend, Governor Lindsey, whom I
happen to have had the pleasure of meeting in San Antonio. It
wasn’t quite in my district. The hotel wasn’t in my district, Gov­
ernor, but it was close enough.
STATEMENT OF LAWRENCE B. LINDSEY, GOVERNOR, FEDERAL
RESERVE BOARD

Mr. L in dsey. Thank you, Mr. Chairman and members of the
committee. I appreciate this opportunity to comment on provisions
of the Federal Reserve System Accountability Act that pertain to
the release of information on monetary policy.
I point out that the Federal Reserve currently provides a great
deal of information to the public about the monetary policymaking
process both formally and informally. We report to the Congress in
a formal sense semiannually on our objectives and plans for mone­
tary policy, and we provide additional testimony on request. We
publish a considerable volume of timely data on our monetary pol­
icy actions.
In addition, we publish minutes of each FOMC meeting shortly
after the following meeting. These minutes are often many pages
in length and fully summarize the discussion at the committee
meetings, and I think are provided in a timely fashion. Federal Re­
serve officials frequently discuss the economic situation and mone­
tary policy in informal contacts with Members of the Congress,
members of the administration and their staffs.
I would also point out, Mr. Chairman, and you mentioned my
trip to San Antonio, that part of our responsibility is to explain to
the public what our positions are, and we, therefore, often speak
out through speeches and other forums, not just on monetary policy
but on economic policy more generally. We go into communities
across the Nation, partly to understand the economic circumstances
and concerns of all Americans, but also to articulate the Federal
Reserve’s position on the economy.
And I have had the pleasure of going to San Antonio twice as a
Governor during the last 23 months. I have met with citizens from
all walks of life there to listen to their needs and explain our mis-




17

sion. In fact, in virtually every city to which I have traveled, over
30 since becoming a Governor, I have met with local business peo­
ple, bankers, and citizens to discuss the economy and its direct im­
pact on their businesses and daily lives. I consider the process of
carrying on a public dialog to be central to my responsibilities.
There are no mysteries regarding my position or thinking. And I
believe the same is true of my colleagues.
In my view, the provisions of the proposed legislation directed at
increasing the availability of monetary policy information probably
would suffer from the law of unintended consequences. Videotaping
FOMC meetings would likely reduce the usefulness of these meet­
ings considerably. Participants would hesitate to use hypothetical
or speculative examples to explain points, because these examples
could be easily misinterpreted and cause unnecessary volatility in
financial markets. Information learned from meetings and travels
is often proprietary or private in nature and thus could not be
shared if the meetings were taped. More generally, the give and
take in the discussion among policymakers would be sharply
reduced.
I think Governor LaWare’s analog/ to a jury is quite apt.
Policy discussions, I believe, would then tend to take place out­
side of committee meetings, and members of the Board and Reserve
bank presidents would come to the FOMC with preconceived no­
tions. The ideas that arise in the current process of open, candid
discussion would no longer be produced in committee meetings and
thus would not be reported in the FOMC minutes. Their loss would
limit the flexibility and give and take of the policy process and, in
so doing, produce the unintended consequence of actually reducing
the net amount of publicly available, informed debate on monetary
policy.
I am also skeptical that, on balance, immediate release of the di­
rective would be useful. While there may be some advantages,
there are also costs. Under current procedures, market participants
and others are able to recognize an actual shift in the Federal Re­
serve’s policy stance on the morning that the change is imple­
mented. Thus, an immediate verbal statement on policy changes
would provide no additional information to the market.
A requirement to publish information could be damaging in cases
where policy contingencies are part of the FOMC directive. In fact,
increased market volatility could potentially result due to market
speculation. Moreover, such a requirement could diminish the com­
mittee’s ability to provide instructions to the Federal Reserve Bank
of New York to respond to such contingencies, potentially hobbling
the Federal Reserve’s ability to resolve financial crises.
Let me turn next to the three specific questions that you posed
in your letter.
First, I do take very sketchy—and I would emphasize the words
very sketchy—notes during FOMC meetings to help organize my
own comments. I discard tnese notes at the end of each meeting.
Second, I believe others will be describing their own note taking,
and the Chairman will describe the note-taking process of the
FOMC secretariat.
Finally, I have no information for the committee on any pre­
mature release of FOMC confidential material.




18

In summary, Mr. Chairman, I believe there will always be a ten­
sion between the benefits of an open and ongoing public debate on
economic policy and the benefits of confidentiality. Although the
current system is imperfect, it is probably better than resolving the
current tension in favor of either fuller openness or greater
confidentiality.
Thank you.
The Chairm an. Thank you, sir.
[The prepared statement of Mr. Lindsey can be found in the
appendix.]
The C hairm an. Governor Phillips.
STATEMENT OF SUSAN M. PHILLIPS, GOVERNOR, FEDERAL
RESERVE BOARD

Ms. P h illip s . Thank you very much.
Mr. Chairman and members of the committee, I am pleased to
have the opportunity to appear before this committee to present my
views on the reporting of Federal Open Market Committee actions.
I am the newest member of the Federal Reserve Board.
Since joining the Board, I have been impressed by the care and
the attention given throughout the System to seeking a broad
range of viewpoints as monetary policy is formulated and con­
ducted. This comes about through various advisory committees,
studies, reports, meetings, and certainly also through the boards of
the individual Reserve banks.
I believe that the System receives considerable cooperation in
this enormous task of economic monitoring, precisely because of the
serious and confidential manner in which business and economic
information is treated by members of the FOMC. Releasing a lit­
eral transcription or videotape of FOMC meetings would likely in­
hibit members’ abilities to obtain and relate confidential informa­
tion because of its potential market sensitivity.
In addition, a literal transcript or videotape of FOMC meetings
may make many members feel constrained to speak only from pre­
pared statements. We will likely lose the analytical approach now
used in building upon each other’s observations in a truly delibera­
tive process. There may also be reduced capability to reach a con­
sensus, since many members’ initial statements may limit their
flexibility to adjust their positions.
We all have an opportunity to edit the minutes before the next
meeting to assure our views are adequately reflected in the min­
utes. To assist in this process I take sporadic, personal notes dur­
ing some parts of the FOMC meetings. Those handwritten notes
are retained in my personal confidential files, shared with no one.
I also know of no one who shares any of the FOMC materials with
the public or the press prior to its official release.
With respect to the question of earlier release of the minutes or
very rapid release of the committee’s decisions or directives, such
a change in procedure would, I believe, curtail the committee’s
flexibility and perhaps even its market effectiveness. Those direc­
tives frequently contain longer range strategies the committee
wishes to adopt. No major market participant, public or private,
could announce its future strategy without that having an impact
on the market itself. Such announcements, I believe, would be self-




19

defeating and limit the Federal Reserve’s ability to affect the mar­
ket as intended.
I hope these comments are helpful to the committee in its delib­
erations. I have confined my comments to the issues that were
raised in your letter. Nevertheless, I would be pleased to respond
to additional questions along with my colleagues. Thank you.
The Chairm an. Thank you very much.
[The prepared statement of Ms. Phillips can be found in the
appendix.]
President Boehne.
STATEMENT OF EDWARD G* BOEHNE, PRESIDENT, FEDERAL
RESERVE BANK OF PHILADELPHIA

Mr. B oeh n e. Thank you very much for inviting me here. I spend
a great deal of time speaking with citizens all across my district,
which is the Philadelphia district, and it is especially nice to be
meeting with you this morning.
Let me begin by saying that I take very seriously my role in
FOMC proceedings ana have a natural bias toward public disclo­
sure and personal accountability. I also take seriously the collective
responsibility of the FOMC to formulate the best possible monetary
policy.
An essential ingredient in formulating the best possible mone­
tary policy is an effective deliberative process—one that fosters the
free flow of information, the ability to speculate about the effects
of alternative policies, the general give and take among members
and the ability to reach a consensus.
I believe the FOMC’s existing procedures generally provide a
workable balance between the need for effective policy deliberations
and the need for public disclosure and accountability.
You have my full comments, but let me comment very briefly on
some of the specific provisions of the bill. I believe the FOMC al­
ready complies with the provision of H.R. 28 that requires that a
written copy of the minutes of each FOMC meeting be made avail­
able to the public within 60 days of it.
For those who read the minutes completely and regularly, the
minutes are typically available within 60 days and are indeed com­
prehensive. The minutes include information about current and
prospective economic and financial conditions, the pros and cons of
alternative policy actions, the reasons the majority favored a par­
ticular action, plus comments, by name, of those members dissent­
ing.
The minutes the committee now releases are not as detailed as
the memorandum of discussion that was released prior to 1976.
But, in my view, the old memorandum had some disadvantages
that hindered the deliberative process.
I attended FOMC meetings during some of the years when the
memorandum was still being prepared. At those meetings, as I re­
call, members of the committee tended to stick more to their pre­
pared statements, and there was less give and take about alter­
native views of the economy and policy actions.
The current arrangement of releasing comprehensive minutes of
FOMC meetings more promptly than the old memorandum in my
judgment better serves both the need for disclosure that is of prac­




20

tical use to the public and the need for an effective, deliberative
process.
Mr. Chairman, you also requested my comments specifically on
three areas.
First, during my tenure as president of the Philadelphia Reserve
Bank, which began in 1981, I have not taken notes during FOMC
meetings. My economic adviser usually takes handwritten notes,
which are then kept in a locked file cabinet with other materials
prepared for each FOMC meeting. He uses these notes to identify
issues that should be explored in future pre-FOMC briefings.
Finally, I am aware, of course, of news stories that have dis­
cussed the premature release of information about FOMC meet­
ings. I deplore such leaks in the strongest possible terms. Security
of FOMC information is taken very seriously at the Philadelphia
Reserve Bank, and I do not have any direct knowledge about how
such leaks occurred.
Thank you.
The Chairm an. Thank you, sir.
[The prepared statement of Mr. Boehne can be found in the ap­
pendix.]
President Broaddus.
STATEMENT OF J. ALFRED BROADDUS, JR., PRESIDENT,
FEDERAL RESERVE BANK OF RICHMOND

Mr. B ro a d d u s. Thank you. I am pleased to be here today to dis­
cuss the procedures FOMC follows in recording policy information
and releasing it to the public.
My views in these areas are based on two principles. First, these
procedures should enable us to make the best possible policy deci­
sions.
Second, in general, we should release as much information to the
public on our policy decision as promptly as possible, provided such
release does not impair our ability to make sound decisions.
Currently, the directive for a particular FOMC meeting is re­
leased immediately following the next meeting, along with a record
of poli<y actions.
I think it is worth emphasizing here today what that record of
policy actions is and is not. It is not a brief summary. Instead, it
is a lengthy and, in my view, very thorough description of the dis­
cussion leading up to the committee’s policy decisions. It indicates
in considerable detail the views of those supporting the decision
and contains a full explanation of any dissenting votes.
As a long-time attendee at FOMC meetings, I can attest that the
record of policy actions always conveys the content and flavor of
the committee’s deliberations as well as its specific decisions com­
pletely and accurately. In my view, the record fully satisfies the
need for the committee to be accountable to the public.
H.R. 28 would change these procedures in two ways. First, it
would require that videotapes of FOMC meetings be made and re­
leased along with a verbatim transcript within 60 days.
My views on releasing videotapes and verbatim transcripts of
FOMC meetings have not changed, Mr. Chairman, since I re­
sponded to your letter on this issue earlier this year. I believe the
prospect of a literal record in any form, even if released after a long




21

period of time, would restrain committee members in debate and
very seriously inhibit the flow and restrict the flow of information
ana ideas. This, in turn, would undermine the deliberative process
and therefore risk lowering the quality of monetary policy deci­
sions.
While I cannot support release of a videotape or other verbatim
transcript of the FOMC meetings, I believe there might be benefits
from releasing a nonliteral but relatively complete record of FOMC
proceedings similar to the old memorandum of discussion that we
prepared until 1976, if and only if there were a long and enforce­
able delay of release, such as the 5-year period in the case of the
memorandum of discussion. Early release of even a nonliteral
record could inhibit FOMC discussion and reduce the quality of
monetary policy decisions. Consequently, I think it is essential that
any reinstitution of something like the memorandum be accom­
panied by a legislative guarantee that it would not be released pre­
maturely.
The second change proposed in H.R. 28 is to release the directive
1 week after an FOMC meeting. Arguments can be made both for
and against this proposal. An early release would be consistent
with the general principle that we should inform the public of pol­
icy decisions as soon as possible. At the same time, I believe early
release could well have announcement effects that could create un­
necessary volatility in interest rates in some situations for reasons
I indicate in my written statement.
Let me respond now to the specific questions raised in Chairman
Gonzalez’ letter regarding my knowledge of notes made at FOMC
meetings. As I indicated earlier, I have attended FOMC meetings
for a number of years, mostly as the adviser to my predecessor as
president of the Richmond Reserve Bank. While in this advisory
position I took notes in order to serve my predecessor effectively.
The notes were handwritten, were never transcribed to type­
written, or any other form, and were not distributed to anyone. I
have always kept these notes in locked confidential files.
I should add I have taken only partial notes since assuming my
current position at the beginning of the year. I now rely on notes
taken by my adviser who follows the same exact procedures I did.
I have only limited knowledge of records made by other FOMC
participants, and I have not read or used any such notes.
Finally, I personally do not know of any information that has
been released by anyone at the Federal Reserve Bank of Richmond
or elsewhere in the Federal Reserve System to persons outside the
Federal Reserve prior to its official release.
I would like to add one additional comment not in my written
statement, but it probably should be. I certainly agree that the
FOMC should be accountable for its actions. Basically, I think we
already are. However, full and effective accountability for any insti­
tution requires that everyone understand clearly exactly what the
institution is accountable for.
With this in mind, I would respectfully suggest that one of the
most positive things Congress could do to raise our already high
level of accountability even higher would be to pass Congressman
Neal’s amendment which would mandate that we achieve and
maintain a stable price level over time.




22

Thank you, sir.
The Chairm an. Thank you.
[The prepared statement of Mr. Broaddus can be found in the
appendix.]
The C hairm an. President Hoenig.
STATEMENT OF THOMAS M. HOENIG, PRESIDENT, FEDERAL
RESERVE BANK OF KANSAS CITY

Mr. H o e n ig . Thank you, Mr. Chairman.
Good morning. I am very pleased to have this opportunity on be­
half of Federal Reserve Bank of Kansas City to express my views
on the disclosure of information of the FOMC meetings. I will tell
you that our district is composed of agriculture, energy, and a lot
of small manufacturing and, therefore, is diverse. I do spend a fair
amount of time within the region listening to and speaking out on
economic policy matters.
As to your purpose of this hearing, let me begin by saying that
I, like others, feel strongly that the Federal Reserve must be ac­
countable for its actions and has an obligation to disclose as much
information as possible about its deliberations and decisions sub­
ject, in terms of balance, to maintaining the highest possible level
of policy effectiveness. It is my belief that the Federal Reserve’s
current disclosure policies achieve these ends and this balance.
These policies provide a detailed accounting of FOMC delibera­
tions and decisions. The minutes of FOMC meetings I think are
comprehensive. They are detailed. They document the information
considered during the meeting and the decisions of each voting
member. Moreover, the minutes provide the rationale for the ma­
jority's decisions and include statements filed by members who dis­
sent from the majority.
In addition, the Federal Reserve reports regularly and frequently
to Congress, ensuring further that we are accountable for our mon­
etary policy actions, that they are explained.
Current procedures foster an environment of open and candid
discussion among the members of the FOMC. Valuable information
from a variety of sources is brought to the discussion, some of it
is provided with the understanding that it be kept confidential.
The give and take among members provides an opportunity to
clarify issues, allows the FOMC to synthesize a range of views. Any
proposals that would impair this deliberative process, given current
procedures that I believe ensure accountability, I think would com­
promise the quality and effectiveness of policy without a significant
offsetting benefit.
Current procedures, in my opinion, also strike—and importantly
strike—an effective balance between timely disclosure and the need
for flexibility in the conduct of policy. These procedures, which pro­
vide release of the minutes shortly after the subsequent meeting,
about 6 weeks usually, allow the FOMC to respond flexibly to var­
ious contingencies over the intermeeting period. Earlier release of
the minutes, I think, would restrict this flexibility and could have
the unintended effect of contributing to market volatility.
With regard to the questions posed in your September 24 letter:
One, I make brief notes for my personal use during FOMC meet-




23

ings, and our bank’s research director also occasionally takes notes.
These notes are kept in locked files, as is other FOMC material.
Two, I have observed other participants taking notes during the
FOMC meetings, but I have no knowledge of their content or
disposition.
And, three, I have no information about the release of informa­
tion by anyone employed at the Federal Reserve about FOMC
meetings prior to the official release of that information by the Fed­
eral Reserve.
In closing, let me reiterate that I believe the FOMC must be ac­
countable for its actions. At the same time, it must be permitted
to pursue effective policy and allow for dialog among its members.
Current procedures provide, I think, the best balance toward
achieving these ends.
Thank you, Mr. Chairman.
The Chairm an. Thank you.
[The prepared statement of Mr. Hoenig can be found in the
appendix.]
President Jordan.
STATEMENT OF JERRY L. JORDAN, PRESIDENT, FEDERAL
RESERVE BANK OF CLEVELAND

Mr. J o rd a n . Thank you, Mr. Chairman, members of the commit­
tee.
It seems to me this series of hearings and various proposals for
legislation, various ideas, center on two questions. One is, what in­
formation should be released and when? And the second is, who
should participate in the deliberations and the formulation of mon­
etary policy actions?
I think that those two questions ought to be addressed in the
context of three main issues. One is the objectives of monetary pol­
icy. I think that can only be the highest standard of living that we
can achieve with our resources, with our labor force, ana so on. I
know that fiscal policies and regulatory policies have other objec­
tives at times, including redistribution, but I think that monetary
policy can only be used to try to maintain the highest growth of in­
come and the lowest sustainable rate of unemployment.
Second, the strategy to do that, I am convinced, is maintaining
price stability. I think that the Congress intended—what really the
Constitution intended in maintaining the purchasing power of the
currency, so that the dollar is a stable standard of value over time.
And the third issue is whether or not independence furthers that
strategy to achieve the ultimate objective.
If these questions of what information we release and when, and
who participates can be addressed in that context, I think we can
clarify the issues involved.
I believe that currently we are releasing the information that is
necessary to make it clear to people what it is we are trying to do,
what our strategy is and that we have the right people participat­
ing in that deliberation.
Regarding your specific questions about notes, I took some notes
the first few meetings of Open Market Committee meetings start­
ing in March 1992 with regard to research topics I wanted to go




24

back and get my staff to work on. I don’t find it necessary to take
those notes anymore, so I don’t take any at all.
I don’t know what kind of notes are kept by other people. I am
learning here today what notes are taken by my colleagues at the
meeting and what they do with them.
On the subject of leaks, I deplore it, as others have indicated. We
are the central bank. Central banks don’t leak.
The C hairm an. Thank you.
[The prepared statement of Mr. Jordan can be found in the
appendix.]
President Keehn.
STATEMENT OF SILAS KEEHN, PRESIDENT, FEDERAL
RESERVE BANK OF CHICAGO

Mr. K eeh n . Thank you, Mr. Chairman and members of the com­
mittee.
As requested, let me briefly summarize my views on the question
of the appropriate recordkeeping and public release of the delibera­
tions of the FOMC.
As I stated in my letter of January 13 of this year to you, Mr.
Chairman, I fully support Chairman Greenspan’s previously stated
position on the various proposals for maintaining and releasing a
more detailed record of the FOMC’s deliberations. In my view, the
minutes of the FOMC, as they are currently written, provide the
right level of reporting and detail necessary to communicate the
current policy concerns and actions of the committee. The minutes
explicitly document the full range of policy arguments made during
the discussion, and when a member of the committee disagrees
with the resulting consensus, that member’s dissent becomes an in­
tegral part of the public policy record.
Based on my participation in FOMC deliberations, I believe that
releasing more detailed minutes, most especially a verbatim tran­
script of the meeting, without a significant delay would be counter­
productive and would impede the development of sound monetary
policy—first, by limiting the free flow of necessary information into
the policy process and second, by hindering the consensus process
so essential if policy is to adequately reflect economic conditions in
all regions of the country.
As president of the Federal Reserve Bank of Chicago, I have an
important responsibility to convey to the FOMC the economic con­
ditions of the Seventh Federal Reserve District. To meet this re­
sponsibility, I and other senior members of our staff maintain ex­
tensive contacts with district businesses, both large and small,
community groups, and State and local government officials. From
these individuals we are able to gather a wide array of highly sig­
nificant information about the district that cannot be derived from
public data sources—information not only about current economic
conditions, but about changes in business practices, future produc­
tion, labor negotiations, investment and hiring plans, and a host of
other issues that have important value to the policy process.
This type of information is particularly important at the present
time. The economy is going through a very different phase than
any that we have experienced in the past. Many of the economic
indicators that have been useful guideposts in developing policy in




the past are now proving unreliable. In such an environment, I find
the regional information derived from local contacts, both about the
Seventh Federal Reserve District and elsewhere in the country, es­
sential to the policy process. In the context of these hearings, it is
important to understand that much of the information that these
contacts provide is highly proprietary and very confidential in na­
ture. I have absolutely assured these contacts that the source and
nature of the data will not be divulged in a wav that they would
find compromising. I have never had anyone decline to speak with
me about their activities. If I could not provide such assurances,
then much of this significant information would not be forthcoming
and the development of monetary policy would be impeded.
It is precisely this type of information about local businesses,
communities, and financial institutions that demonstrates the
value of the regional structure of the Federal Reserve System and
district representation on the FOMC. The impact of releasing such
information as part of the written record of the FOMC without a
significant delay would only result in the exclusion of this vital in­
formation from the FOMC policy discussion. In my view, this would
not be in the public interest, especially when the current system
of disclosure is able to convey an accurate description of the key
issues and arguments underlying the FOMC’s decisions, as well as
record individual votes and dissenting positions.
As to the specific questions that you asked me to address: I pre­
pare an outline of economic conditions in the district which forms
the basis for my remarks at each meeting of the FOMC. After the
meeting, these notes are kept secured in my office until the next
meeting at which time I destroy them. I do not maintain notes on
the discussion that takes place at the meeting itself, and Chairman
Greenspan has described the records that are kept by the FOMC
secretariat.
As to the premature release of information from the FOMC meet­
ings, I have not talked to the press or other outside contacts, nor
to other Federal Reserve officials who do not have authorized ac­
cess to FOMC information and my only direct knowledge of such
premature releases arises from articles I have seen in various
newspapers. I completely concur with Chairman Greenspan that
premature releases of this type of information are highly inappro­
priate and totally unacceptable.
Thank you.
[The prepared statement of Mr. Keehn can be found in the
appendixj
The Chairm an. President McTeer.
STATEMENT OF ROBERT D. McTEER, PRESIDENT, FEDERAL
RESERVE BANK OF DALLAS

Mr. M cT e e r. Thank you, Mr. Chairman, for your invitation to
testify on H.R. 28. I will limit my testimony to the issue of FOMC
records, although I do have opinions on other parts of the H.R. 28,
especially the part that puts me out of work.
I became president of the Dallas Fed in February 1991, so I am
a relative newcomer, both to the FOMC and to your great State of
Texas, Mr. Chairman, and also Congressman Johnson’s. As the




bumper sticker says, “I wasn't bom in Texas, but I got there as
soon as I could.”
Prior to moving to Texas 2 V2 years ago, I was with the Federal
Reserve Bank of Richmond for 23 years, the last 11 of which I
served as manager of its Baltimore branch. I have participated in
FOMC meetings since 1991, but did not vote until this year.
In your letter you asked us to respond to three specific questions
regarding note taking in FOMC meetings. Regarding my own prac­
tice, I don’t take notes of the type I assume you mean. I do a lot
of reading and homework prior to the meeting and I go into the
meeting with some tentative ideas in mind. I doodle during our dis­
cussions and occasionally write down a word or phrase for ref­
erence when I speak. I don’t write down decisions because they are
simple and easy to remember, and normally come at the end of the
meeting.
My doodles and notes all mixed up would be of no use to traders
or journalists. I destroy them after the meeting and rely only on
official documents for future reference.
Regarding your second question, notes kept by others, my im­
pression is that most other members and staff probably follow a
pattern similar to my own since all who are present presumably
have access to the official records and documents. At least, I have
no knowledge to the contrary.
In answer to your third question, I have no information about
the premature release of FOMC information by anyone at the Fed­
eral Reserve. Let me add that, in my opinion, if someone wanted
to leak valuable information about the committee’s decisions, such
notes would not be necessary nor even very helpful. While the deci­
sion process may be difficult, while the debate may be difficult, the
decisions themselves are very simple and easy to remember with­
out notes.
Let me comment briefly on other aspects of meeting records. As
a former economist, I have some sympathy for the idea of imme­
diate release of the directive or decision. Immediate release of the
decision would eliminate any question of leaks or the appearance
of leaks.
The practical problem with immediate release of the directive is
that not all decisions are clear-cut decisions to ease, tighten, or re­
main unchanged. On occasion, the committee votes to hold steady,
pending further information or developments, and wishes to give
the chairman extra leeway to act on his own prior to the next
scheduled meeting. More often than not, I believe, these asymmet­
ric directives are not acted on, but occasionally they are.
To announce a decision of no change without the proviso would
be misleading to the public, and to announce it with the proviso
would likely cause the markets to react in a way not necessarily
warranted by subsequent information.
Given this dilemma, I believe the current arrangement is best.
Markets are able to discern the immediate decision by watching
the Federal funds rate the following morning, and we retain maxi­
mum flexibility to react to incoming data and changing cir­
cumstances without misleading anyone. Then as soon as another
meeting is behind us, we release the directive that includes the




27

prevailing circumstances, the rationale for the decision, and the
identity of any dissenters and their reasons for dissenting.
I personally have a greater problem with videotaping and ver­
batim transcripts of discussions than with the prompt release of de­
cisions. I believe that videotaping or verbatim transcripts, no mat­
ter how they are released to the public, would diminish the quality
of our deliberations. My colleagues and I are willing to listen to
each other and adjust our initial leanings in the interest of consen­
sus-building.
We currently don’t posture for the record or for the camera.
There is no winning or losing the debate. There is no playing to the
gallery or to the folks back home. This, I am afraid, would all
change with videotaping or its equivalent.
I would much prefer present arrangements even with more detail
added, as long as the detail involves the substance of the discus­
sions and the decisions rather than the language used. I would also
have no objection to detailed minutes, not a verbatim transcript,
being released after a lengthy period of several years, as long as
the legal obstacles to such a delay could be overcome. Thank you.
[The prepared statement of Mr. McTeer can be found in the
appendix.]
The Chairm an. Thank you very much.
President Melzer.
STATEMENT OF THOMAS C. MELZER, PRESIDENT, FEDERAL
RESERVE BANK OF ST. LOUIS

Mr. M e lz e r . Thank you, Mr. Chairman. I am pleased to appear
before the committee today to testify on the prompt public disclo­
sure of Open Market Committee meetings. As a creation of Con­
gress, the Federal Reserve System is fully accountable to the public
for its monetary policy actions. One way we ensure this account­
ability is by releasing information about our policy decisions. The
Federal Open Market Committee provides a full accounting of its
actions in its minutes of the Federal Open Market Committee.
The minutes, as has been mentioned earlier, contain all impor­
tant information about FOMC decisions, including the policy direc­
tive agreed upon by the majority and the reasons underlying the
policy decisions. Any significant differences among those voting
with the majority, as well as the views of any dissenting members,
are included in the document. The minutes are released upon their
approval by committee members at the next FOMC meeting. The
public record thus contains the outcome of FOMC deliberations and
the policy views of each member of the committee.
I am not in favor of producing a further detailed account of
FOMC deliberations, either in the form of an edited transcript,
such as the memorandum of discussion, verbatim minutes, or an
audio or videotape. Such a release, in my judgment, would impede
the deliberative process and thereby impair policymaking.
Arriving at appropriate policy often involves considerable give
and take, consensus-building and debate of alternative actions. Be­
cause of the possibility that a particular statement might be mis­
understood or taken out of context, FOMC members would be reti­
cent to engage in the kind of open discussion that leads to good pol­
icymaking if they knew that all of their statements would be in the




28

public record. Furthermore, the release of verbatim minutes or any
other detailed record of deliberations would discourage other par­
ties from supplying the FOMC with confidential information that
is useful in determining appropriate policy.
Turning to the timing of the release of the FOMC policy direc­
tive, I believe that immediate release of the outcome of FOMC de­
liberations would interfere with the deliberative process and would
lessen the flexibility with which the Federal Reserve can respond
to changing economic conditions. If directives were released imme­
diately, the FOMC might be reluctant, even if economic conditions
warranted, to take a timely subsequent action because of concern
that such action would add to the uncertainty in financial markets.
In addition, the FOMC would be less inclined to bias its direc­
tives toward ease or restraint, in effect limiting its policy options.
Consequently, reaching a consensus among FOMC members would
be difficult, which might delay policy actions and add uncertainty
to financial markets.
Finally, let me turn to the three specific questions raised in your
letter, Mr. Chairman, of September 24. I have included answers in
my statement submitted for the record.
To sum up, then, the Federal Open Market Committee is com­
mitted to informing the public of its policies, which ultimately must
be judged by their results. Minutes of the Federal Open Market
Committee convey fully the relevant information about FOMC deci­
sions and do so in a timely manner. Thus, in my view, there is lit­
tle to be gained by providing detailed minutes or mechanical repro­
ductions of FOMC deliberations, while the adverse consequences of
doing so are potentially very great.
In addition, the benefits of immediate release of the policy direc­
tive would not seem to outweigh the potential cost of doing so.
By inhibiting the frank exchange of views and possibly reducing
the willingness of the FOMC to take timely actions, public release
of the details of committee deliberations or immediate release of
the policy directive could harm the policymaking process. Although
intending to increase the accountability of FOMC members, the
proposed changes in H.R. 28 may thus impede monetary policy per­
formance.
Thank you.
[The prepared statement of Mr. Melzer can be found in the ap­
pendix.]
The Chairm an. Thank you.
President Parry.
STATEMENT OF ROBERT T. PARRY, PRESIDENT, FEDERAL
RESERVE BANK OF SAN FRANCISCO

Mr. P a rry . Thank you, Mr. Chairman and members of the com­
mittee. As president of the Federal Reserve Bank of San Francisco,
one of my jobs is to contribute to Federal monetary policy delibera­
tions with information and ideas from my district. The 12th Fed­
eral Reserve district is highly diverse. It is made up of the nine
western States which at present include three of the more robust
State economies in the country: Utah, Idaho, and Nevada, and one
of the weakest, California. In fact, California has seen employment
fall by 592,000 jobs since mid-1990.




29

With that introduction, I would like to express my appreciation
for this opportunity to discuss the disclosure of information about
Federal Open Market Committee meetings. As I stated in my letter
of January 13, 1993, I believe that there should be a presumption
that Fed deliberations should be fully disclosed unless there is a
compelling reason not to do so.
In the case of FOMC deliberations, such a compelling reason ex­
ists. As discussed in my written testimony, I am concerned that
verbatim records or videotapes would inhibit the free flow of com­
ments at our meetings, and thus the process limit the effectiveness
of our policy discussions.
Now, I will turn to the specific questions raised in your letter to
me dated September 24. I do not take notes of what is said at
FOMC meetings. However, I do take into the meetings notes con­
cerning the comments I plan to make about the national and 12th
district economies, about monetary policy, and occasionally about
special topics that are on the agenda for a particular meeting.
These talking points are stored in locked files at the Federal Re­
serve Bank of San Francisco, in accordance with FOMC security
procedures. My actual statements often divert somewhat from my
notes, and I also make impromptu comments at each meeting for
which I have no notes.
I also take into FOMC meetings a briefing book prepared by the
research department at the bank. This book contains analyses and
forecasts of developments in the U.S. economy, analysis of develop­
ments in the 12th district, occasionally discussions of special topics
related to FOMC issues, and analysis of monetary policy issues and
recommendations by my staff.
The director of research at the bank, and occasionally his alter­
nate, take handwritten notes of comments made at FOMC meet­
ings when they attend as my adviser. These notes are for their own
use in directing FOMC policy analysis within the research depart­
ment. They are stored in their locked files at the bank in accord­
ance with FOMC security procedures.
Finally, with respect to your question about leaks of confidential
FOMC information, I have never knowingly divulged any FOMC
information to unauthorized persons prior to the official release
date, and I have no information concerning anyone else doing so.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Parry can be found in the
appendix.]
The Chairm an. Thank you.
President Stern.
STATEMENT OF GARY H. STERN, PRESIDENT, FEDERAL
RESERVE BANK OF MINNEAPOLIS

Mr. S te r n . Thank you. Mr. Chairman and members of the com­
mittee, I appreciate this opportunity to discuss issues related to
maintaining a record of Federal Open Market Committee meetings
and procedures followed at the Federal Reserve Bank of Minneapo­
lis to handle confidential monetary policy material. These are in­
deed significant matters.
As indicated in my January correspondence, I am convinced
there is considerable value in our current report of FOMC proceed-

7 3 -2 0 8 0 - 9 4 - 2




30

ings. As you know, we release extensive minutes of each FOMC
meeting shortly after the subsequent meeting. The minutes de­
scribe the discussion and the votes of individual members. More
specifically, they include an assessment of business conditions here
and abroad, price developments, and performance of financial mar­
kets and monetary aggregates.
They report the committee’s views of prospects for the economy,
frequently including information gleaned from personal contacts in
individual Federal Reserve districts. The minutes also report the
discussions of monetary policy options as well as the decision ulti­
mately reached by the committee, including dissents, if any, and
the logic underpinning the dissents.
This amounts to a good deal of information in my view, and I do
not find merit in suggestions to prepare and release at any time
a literal record of FOMC deliberations through videotaping or other
vehicles. Three issues in particular concern me.
First, given the gravity of our responsibilities, I believe it is im­
perative that the quality of our deliberations be maintained. Open
discussion of ideas, of policy alternatives, and of significant poten­
tial risks to the economy are critical to sound policymaking.
Second, some of the information we discuss is voluntarily pro­
vided on a confidential basis. We have an obligation to maintain
that confidentiality.
Third, I believe our procedures carefully balance the need to pro­
vide information to the public with the necessities of effective mon­
etary policy. Even small changes carry the considerable risk that
they will disturb, perhaps unknowingly and unintentionally, this
balance, with adverse consequences for financial markets and eco­
nomic performance.
As indicated in my earlier correspondence, I believe there could
be some merit to reintroduction of something like the memorandum
of discussion, a very detailed, although edited, accounting of FOMC
discussions, provided that the confidentiality of such material is as­
sured for several years. As I see it, such a document could be use­
ful to historians and students of monetary policy when they inves­
tigate the broad context of policy decisions and the evolution of the
policymaking process.
Finally, in response to your specific inquiries about confidential­
ity, I am unaware of any unauthorized release of monetary policy
information ever emanating from the Federal Reserve Bank of Min­
neapolis. My economic adviser and I leave highly confidential mate­
rial at the Board of Governors and do not return with it to Min­
neapolis. I take limited notes during the meeting, as does my ad­
viser. All notes or other materials are handled according to strict
guidelines, and I attached a copy of those guidelines with my pre­
pared statement. Thank you.
[The prepared statement of Mr. Stern can be found in the
appendix.]
The Chairm an. Thank you, sir.
President Syron.




31
STATEMENT OF RICHARD F. SYRON, PRESIDENT, FEDERAL
RESERVE BANK OF BOSTON

Mr. S y ro n . Thank you, Mr. Chairman. In the interests of time,
I will try to be very short. Being involved in making monetary pol­
icy is something that is a great responsibility and enormous honor.
Thus, from a purely personal perspective, I would welcome my
views being made more public. However, as others have said, the
key issue to me is what will provide the best policy for the people
of the United States, and in my case for the 1st district.
In this regard I believe there are difficult tradeoffs between open­
ness and the effectiveness of the deliberations that lead to the de­
velopment of monetary policy. Because we work for you as crea­
tures of the Congress, these tradeoffs are a valid reason to have
this discussion today. But we need to think a lot about what is
involved.
I am concerned that a highly detailed accounting of FOMC delib­
erations, unless its release were accompanied by a delay of several
years, would impair the ability of the FOMC to obtain and discuss
confidential information essential to developing monetary policy. It
would impact what I do personally. I literally never go anywhere
on a personal or professional basis without asking people about
what is happening in the economy.
As others have said, being able to assure people that information
they give you is confidential is an important part to being able to
get that information. I believe the value of this process is dem­
onstrated by New England's experience in the most recent
recession.
The recession began earlier in New England than it did in other
parts of the country, and proportionately many more jobs were lost.
As a consequence some of our banks developed serious problems.
These difficulties contributed to a credit crunch. The credit crunch
was the subject of hearings held by this committee.
These problems were discussed extensively at FOMC meetings.
It wouldn’t have been possible to convey the seriousness of this
problem without discussing individual lenders and individual firms
and how it affected their employment plans, investment plans, and
other business decisions.
But, if the people from whom we gathered this information knew
it would become public, they certainly, in their own interest,
wouldn’t have volunteered it, and our understanding of the prob­
lems would have been greatly constrained.
Again, I think tradeoffs are involved. The more specific are the
references in the record of FOMC deliberations, the longer would
be the time lag required before disclosure if access to valuable, con­
fidential information is to be maintained.
If confidentiality could be assured and there were sufficient lags,
I would have some sympathy for resubmitting the memorandum of
discussion mentioned by others today. However, a second tradeoff
is that much of the discussion and economic information subse­
quently disclosed in FOMC meetings pertains to the valuation of
assets, value changes that can have a substantial impact on world
financial markets.
Fluctuations in asset values can have significant impact on the
jobs of workers, and the incomes of investors. Public disclosure of




32

preliminary and exploratory discussions could generate unintended
value changes that could lead to adverse and unnecessary reactions
in the economy.
In summary, the ultimate objective of monetary policy is to pro­
mote the highest sustainable standard of living possible for Ameri­
cans. The policymaking process should be as open as it can be, con­
sistent with that objective, and that is what we are here to explore
this morning.
My formal answer to the three questions you asked, Mr. Chair­
man, are contained in my written statement.
[The prepared statement of Mr. Syron can be found in the appen­
dix.]
The Chairm an. Thank you very much. May I take this oppor­
tunity to thank you for the graciousness with which you met the
committee in Boston when we were there for a hearing on CRA and
with your good work with respect to CRA.
Well, it looks like we don’t have a consensus on H.R. 28 yet, but
we are working up to it and hope springs eternal. At least we made
a dent on Chairman Greenspan’s total unacceptability. There are
some indications there is a little glimmer there for some hopeful
change.
I have a couple of questions. In the questions that I had directed,
I did ask and each one of you responded, as to their notes or
records that you are aware of. But today’s testimony by Chairman
Greenspan reveals to me, at least, that the FOMC meetings are
tape-recorded.
As far as I know, I had not been aware of that, or know of any­
body else that had been aware of that. I don’t think we had been
previously informed that there were these tape-recordings. What I
am going to ask is if any of you knew or know about these record­
ings being made when you submitted your written testimony for to­
day’s hearing, or are you unaware that tape-recordings of FOMC
meetings are customarily being made.
Can you tell me exactly of any tapes of FOMC meetings now in
existence that you do know about? I would be glad to hear from
any of you.
Mr. G reen sp an . Mr. Chairman, may I clarify that?
The Ch airm an . Certainly.
Mr. G reen sp an . In my remarks, what I indicated was that the

FOMC staff, in the preparation of the minutes, takes a recording
for purposes of getting a rough transcript, but the tapes are taped
over. In other words, we don’t keep the actual tapes themselves.
We do not have electronic recordings of the meetings.
The Chairm an. I am a little bit confused here. In other words,
you have no tape-recordings of the actual proceedings.
Mr. G reen sp an . We have them only—as far as I know, what the
staff does is, in order to assist its presentation and preparation of
the minutes, it takes recordings but then tapes over them so they
are not available thereafter.
The Chairm an. Well, I am glad my staff doesn’t. Of course, I
don’t know that I would grant that much blanket authority. Any­
way, the second question, about the so-called leaks, in your testi­
mony, Chairman Greenspan, you say, and I quote, “From time to




33

time I have briefed members of various administrations about the
outcomes of FOMC meetings.”
Now, you also say that you have not done it in the last IV2 years.
Now, what I am really wondering about, how do each of you decide
who to approve for the Chairman’s disbursal of confidential FOMC
information? Is it just a coincidence that the official leaks went to
the Bush administration, but not to the Clinton administration? If
monetary policy changes again, who will receive those?
Mr. G reen sp a n . Mr. Chairman, let me just say, as I indicated
in my prepared text, what I do is try to communicate as best I can
to the administration, whomever it may be, what the underlying
monetary policy of the Federal Reserve is, and most importantly,
to try to convey to them, those relevant individuals, why we are
doing what we are doing and why we may do something else.
In other words, I try to convey the substance of our deliberations,
because if is important for individuals within the administration to
know what we are doing so that they can do what they are doing
better.
In other words, we in previous testimonies have discussed the
question of the interaction of monetary and fiscal policy and the ne­
cessity of communicating, and that is precisely what I was refer­
ring to. The notation I made with respect to the last year did not
have to do with an ending of communication.
On the contrary, I communicate more now than I have ever done.
I was merely suggesting that an occasion to stipulate to them that
we actually changed policy has not been necessary. But as I have
suggested to you previously, the contacts I have personally with the
individual key policymakers of the administration is exceptionally
extensive and works very well.
The Chairm an. Thank you very much.
Mr. Leach.
Mr. L ea ch . I thank the chairman. It has been an extraordinary
hearing, and I have the sense that all of us are learning from each
other. Let me just ask, first of all, in the area that I am most inter­
ested in many ways is how the regional bank presidents are se­
lected. There are basically three ideas that have been discussed in
Congress.
One relates to whether the regional bank presidents ought to be
designated by the President with the advice and consent of the
Senate. The second is whether regional bank presidents should
participate in the Federal Open Market Committee. The third is
whether the regional bank presidents should be designated by the
Chairman of the Federal Reserve Board. All three relate to the po­
litical science dilemma regarding regional bank presidents being
designated by boards, the majority of which are composed of people
whom they regulate, which is an awkward circumstance; or have
as one of their responsibilities regulation; as well as the political
science dilemma of representing only one industrial sector in Open
Market Committee meetings.
And so what I would like to ask, first, of the regional bank presi­
dents, of these three approaches, if there were change, recognizing
that perhaps no change is preferred, which of the three would you
find most reasonable? Maybe I should start at this end.




34

Mr. S y ro n . Mr. Leach, I would like to make one comment about
the regulatory concern. I understand the point that you are raising,
in that there is an appearance of a problem. With regard to regula­
tion the Federal Reserve Act makes clear that at the district level
the presidents act as agents of the Board. Thus I, and I am sure
this is true of my colleagues, never discuss a regulatory matter on
a specific institution at a Board of Directors meeting. We talk
about banking conditions overall, but we absolutely never discuss
specific cases that are pending.
Mr. L each . But you are selected by the Board and you are ac­
countable to the Board.
Mr. S y ron . That is right. In response to your specific question,
as you might expect, I think the present system has worked quite
well, and thus of the three choices you present, if I had to choose
I would prefer the one that represents the least change, which is
the suggestion to have the presidents designated by the Federal
Reserve Board.
Mr. L each . Sure.
Mr. Stem, would you agree with that?
Mr. S te r n . I think I would agree with that, but I would empha­
size that the selection of Reserve bank presidents, ultimately those
appointments have to be approved by the Board of Governors, so
they are not made simply in isolation in the Reserve districts.
Mr. L ea ch . Fair enough.
Mr. Pariy.
Mr. P a rry . I think the Chairman already has—and the Gov­
ernors have tremendous influence on the selection of the presidents
at the present time.
Mr. L ea ch . But of those three changes, which would you prefer?
Mr. P a rry . I would prefer the third.
The Chairm an. Mr. Melzer.
Mr. M e lz e r . I just wanted to add a little to what Dick Syron was
saying, if I could. I think with respect to the composition of the
boards, as you know there are only three bank directors, and they
come from three different groups of banks within the district. In
other words, banks are broken down by size according to capital,
so that it is impossible, for example, for large banks to dominate
a Reserve bank board. Second, with respect to the other three di­
rectors who they nominate and elect, it is my experience that those
directors are anything but pawns of the bankers. They can’t be
bank officers; they can’t be bank directors. There may be an ap­
pearance problem, but as a practical matter, from firsthand experi­
ence, I have not seen any of those individuals to be what could be
described as pawns of the bankers.
And, third, in connection with the appointment of presidents,
again, based on the experience at our bank, the search committee
for a president would be chaired by either the Chairman or Deputy
Chairman, a Class C director, one of the three public directors.
There may be one bank director on a search committee, but it
would not be dominated by so-called banker directors.
And, finally, as has been noted, the appointment of a Reserve
bank president must be approved by the Board of Governors, so
that there is a already a very important public role in connection
with that.




35
Mr. L e a c h . W hich o f the three would you prefer?
Mr. M e lz e r . It is difficult for me to say. I guess on the theory

that your suggestion is the least change, perhaps that one. But I
think, as Chairman Greenspan noted the other day, that would
have a significant impact, in my judgment, in terms of the role of
regional Reserve bank boards of directors and the great benefit
that we get from their input. I think that is why the Federal Re­
serve operates as efficiently as it does, because in effect we are ap­
plying, and have been for many years, private sector management
concepts to the operation of our activities.
Mr. L ea ch . I appreciate that. My problem is my time has ex­
pired. Let me ask briefly, would anyone differ with what has been
said?
Mr. J o r d a n . I differ, because it would destroy the Federal Re­
serve Bank System.
Mr. L ea ch . Would you prefer that, would you rather have the
President appoint-----Mr. J o r d a n . I would not prefer any of those.
Mr. L e a ch . Would you prefer to have the district Governors not
on the Federal Market Committee?
Mr. J o r d a n . These are not acceptable choices. Making the presi­
dents nonvoting members, appointment by the President and con­
firmation by the Senate, or appointment by the Board of Gov­
ernors, would alter the Federal Reserve substantially, and in a
very harmful way. It would not be a job I would want——
Mr. L e a ch . Of those three which would you find most----Mr. J o r d a n . I would not be a part of the system if you made any
one of those three decisions.
Mr. L ea ch . That is intellectually irrational. Let me pin you
down, Mr. Jordan.
Recognizing you might prefer not to serve under any of them,
which is the least appealing?
Mr. J o r d a n . I think it wouldn’t come to that because you don’t
have a regional diversified decentralized system of Reserve banks
if you make any one of those changes. You have a system of
branches across the country. That outcome was considered by Con­
gress in 1913 and rejected. It would destroy the system.
Mr. L e a ch . President Hoenig.
Mr. H oen ig . Obviously, the preference is with the current. But
I would make a slight change in what you are saying. The three
Class C directors are appointed by the Board of Governors, and
rather then having it appointed by the Board, I would suggest you
have the three Class C directors do that with input from the other
directors with the same veto power that is with the Board of Gov­
ernors. That way you have it with those appointed by the Board
of Governors, not from this elected group as such, but you have
input from them, and yet you have those three that are not elected
actually making the appointment, and you still have the Board of
Governors who can veto that.
That is, I think, a better option than perhaps your third.
Mr. L ea ch . Does anyone else wish to comment?
Mr. B ro a d d u s. If I were forced to choose, I would choose the
third alternative, but very reluctantly. It would change what is
now a Federal Reserve System to a central reserve system. I went




36

through this process last year and I can tell you the Board of Gov­
ernors played an important role in reviewing my appointment and
also the search committee that selected me included two Class C
directors.
The C hairm an. Let me suggest that since the time has expired
that any other comment be submitted in writing.
Mr. Neal.
Mr. N e a l. Thank you, Mr. Chairman. You said a minute ago you
didn’t think we had a consensus on this bill. I want to point out
I think we, frankly, did. I did not find any support for the idea of
the bill at all among any of our witnesses. I read that as a pretty
solid consensus. And I think that is important, because our wit­
nesses are the country’s premier experts on this subject.
And so their opinion is important, and their opinion in regard to
Congressman Leach’s ideas also is important. And again, I think
there was consensus. They don’t think we ought to inhibit what is
now a very broad-based system.
I want to ask these witnesses’ opinion on another subject, be­
cause I think ultimately you and Mr. Leach, in fact all of us, want
accountability. It just seems to me we are going about it in a little
different way. I think there is a possible solution here, and I want
to make a stab at it. It may work; it may not.
But as President Broaddus mentioned, I want to say this to the
witnesses. You already may know, I have introduced legislation
which would in effect require 100 percent accountability, oecause
it would say that the Fed should require, over time, over whatever
time it takes to avoid recession, a particular policy, and that policy
is zero inflation or price stability, as the economists like to say, we
mean the same thing. I want us to achieve and maintain this as
zero inflation, price stability, because I am convinced it is the es­
sential policy necessary for us to achieve everything else it is that
we want for the economy.
It will allow us to achieve and maintain the lowest sustainable
long-term interest rates, the highest sustainable levels of economic
growth, the highest sustainable levels of employment, the highest
levels of savings, and therefore investment, productivity, growth,
the highest levels of efficiency in our economy, everything we want,
the highest level of prosperity for all of our people.
So, since I think we do know what is the best possible policy for
the Fed, I would just like to ask our witnesses if they agree that
this is the best policy or not, and if not, what they would say about
it, and if they agree it is the best policy, do they think they should
be held accountable to it, which is to say, would they support pas­
sage of our legislation, which would in effect require the Fed to
achieve and maintain over a period of time, not overnight, but over
a period of time, price stability?
So just briefly, if I could, ask each of you to comment. Let me
start at the left.
Mr. K e lle y . Mr. Neal, I fully support your suggestion and have
done so over the years. The Federal Reserve is a creature of the
Congress, and the Federal Reserve should endeavor to try to fulfill
the will of Congress as its boss, if you will.
In order to achieve what the boss wants, it is necessary for the
organization to understand just what that is. Very frankly, now




37

there are various voices that come to us from the Congress. I know
of no one who has advocated inflation per se, but on the other
hand, there are suggestions that come forth that could very easily
lead in that direction, and in short, our mandate is unclear.
I think it would be very helpful if it were clear. As things are
now, I think it is somewhat confusing to the markets. I think it is
confusing to other central banks ana to other governments, as to
just what our mandate is from the Congress. And I think we would
appreciate very much having that much more clear.
Mr. N e a l. I know I am going to run out of time, so if I may just
ask each of you to comment as briefly as you can. I would love to
hear in great detail from all of you, but I know we are going to run
out of time.
Mr. L aW are. I certainly agree that the primary focus of mone­
tary policy should be price stability tempered by the additional re­
sponsibilities for sustained economic growth and as full a level of
employment as is consistent with those two conditions.
Mr. Lindsey. I agree with your objective completely, Mr. Neal.
I would just caution you that perhaps binding the Federal Reserve,
the Congress might find, binds itself with regard to fiscal policy de­
cisions. For example, one could imagine a value-added tax being
passed by the Congress. I am not recommending it, but you would
want to think long and hard about binding the Federal Reserve in
the face of maintaining price stability.
Mr. P h illip s . I do agree with your objective in terms of that it
should have as its goal the achievement of real sustainable eco­
nomic growth in an environment of stable prices. I think that is
what we are trying to achieve.
Granted, we may disagree at times as to how to get there, and
that is one of the very constructive parts of this assembly in the
give-and-take process.
Mr. B o e h n e . I would state the goal somewhat more broadly. I
think, Congressman, that the goal of the Fed and indeed all eco­
nomic policy is economic growth, producing jobs, and higher stand­
ards of living. I think over the longer pull, the most significant con­
tribution that a central bank can make is low inflation. But I think
we always need to keep that in the context that that is a means
to an end, and the end is growth, jobs, and higher standards of
living.
And I think clearly from experience we know we do a lot better
with low inflation rates rather than high inflation rates in pursu­
ing those ultimate objectives.
Mr. B roa d d u s. I strongly, vigorously support the amendment
specifically because I think it would enable the Federal Reserve,
the Open Market Committee to make its maximum contribution to
sustained employment and growth.
The C hairm an. I will suggest that any additional comments be
submitted in writing, since the time has expired. In fact, we have
gone over just about equal to the time we allowed Mr. Leach.
Mr. Roth.
Mr. R o th . Thank you, Mr. Chairman. Mr. Chairman, I came
here this morning asking myself, you know, what kind of a testi­
mony are we going to hear today? What is our chairman after
today? But I must say I was a little shaken by the testimony today.




38

The reason I say that is, when I look at these hearings, I always
ask myself, how is it perceived by the general public, because here
in our country we are really facing a severe problem of public trust
and confidence in our institutions.
We, as Congressmen, when we go home, we find that all the
time. That is a big issue when we are at our town hall meetings.
So for the American people, the Federal Reserve is really sort of
a big question mark. What kind of powers do they have, and it is
like a hidden hand in our economy.
I think you ladies and gentlemen are aware of that. When I hear
testimony of leaks and tapes erased and notes hidden away in stor­
age boxes, the public perception is, there is something going on
there that shouldn’t be going on there. So I think the question I
would have is, why shouldn’t the public question what goes on at
the Fed?
Mr. B oe h n e . I think, indeed, the public does have more than a
right. I think it has an obligation to question what goes on at the
Fed. I think that comes through in a variety of ways when we meet
directly with the public and through you as their representatives.
Speaking for myself, I want to be as completely open, no secrets,
as possible in the conduct of monetary policy. However, I think that
we all realize that there is a tradeoff sometimes in public policy be­
tween openness and the quality of the product, the quality of mone­
tary policy. We are trying to find the right tradeoff.
Mr. R o th . Let me phrase the question this way. All the testi­
mony I have heard this morning could be capsulized as:
Videotaping and verbatim transcripts, no matter when they are re­
leased to the public, would decrease the quality of the delibera­
tions. I think that is basically what everybody has said. So you
make monetary policy, but Congress makes fiscal policy. Your ar­
guments are the same arguments we heard before Congress was
televised. But do you think that Congress, and we make the fiscal
policy, do you think that Congress has been less well served be­
cause we have been televised?
Mr. B oe h n e . I am reluctant to comment on the quality of fiscal
policy.
Mr. R o th . But seriously, I think that is the question, I think,
that basically is what we are wrestling with.
Mr. S y ro n . Congressman, I think that is a relevant point, but
fiscal policy that is made in a more episodic sense. It is made not
on a continuous basis, where monetary policy is. Monetary policy
is reported to the Congress twice a year in Humphrey-Hawkins
hearings. While I am not opposed to having the degree of openness
that is necessary, monetary policy does require input from con­
fidential sources. It would be impossible to get confidential infor­
mation from financial markets, companies, and other parts of the
private sector.
Mr. R o th . Mr. Syron, what goes on at these meetings that is so
confidential that is going to hurt the public or the Congress if 60
days after the meeting Congress or the public read the transcript?
Mr. S y ro n . I think it depends on what is discussed at the meet­
ings. I will give you a specific example. I come to a FOMC meeting
talking about the credit crunch issue and I mention a specific com­
pany in one of the States in the New England district.




39

I give the company’s name, and say I am concerned that it is
going to go out of business, this is what the employment effect is
going to be, depending upon its capital flow over the next 90 days
and what its bank does. That company is not going to give me that
information if it is going to be included in a publicly available tran­
script in 60 days.
Mr. R o th . Mr. Syron, that happens to us all the time. We get
all kinds of cases, where people write to us, and we use that on
the floor of Congress without giving their names.
Mr. S ybon . They give you that information because they want to
make a specific point and they are writing to you of their volition.
We are going out seeking the information from them. I am talking
about a process where we are continuously and appropriately ask­
ing people in our districts for confidential information. I am afraid
that in an open, or videotaped session, you would dramatically
alter our potential of getting that information.
Mr. Roth. I appreciate your comment.
Mr. Chairman, I want to make this comment in closing. There
is no one on this committee that is a better friend of yourselves
than I am. But I just want to say this. In the climate we are living
through today, wnere there is so much public distrust and a lack
of confidence in our public trust, I think we are coming to the point
where all these things are going to have to be brought out in the
open whether we like it or not, because I think the public is going
to demand that. Thank you very much.
The Chairm an. Mr. Hinchey.
Mr. H in ch ey . Thank you, Mr. Chairman. First of all, you are a
very impressive group of Americans and I very much appreciate
your being here and the opportunity to be with you. I express my
appreciation to you, Mr. Chairman, for providing these gentlemen
here.
First, with regard to the question that the chairman asked of Mr.
Greenspan earlier, I just want to see if I understood the answer.
As I understand it, there are tape-recordings taken of the meeting
by staff. Those tape-recordings serve as the basis for the prepara­
tion of the minutes that are released a month or so later after the
next meeting. And in the interim, those tapes are then taped over
so that no permanent record exists in that way. Is that correct?
Mr. G reen sp a n . There is no permanent electronic record, that is
correct. We obviously have rough notes-----Mr. H in ch ey . You do make recordings, but the recording is taped
over?
Mr. G reen sp a n . That is correct.
Mr. H in ch ey . After the staff then prepares the minutes in prepa­
ration for their release at a subsequent date, a month or so later,
between that time, the time that the staff prepares the minutes
and their release, do the members then have an opportunity to re­
view those minutes?
Mr. G reen sp a n . Yes. The minutes are drafted by the staff in
some detail, circulated to the individual members to make certain
that they capture the substance of what went on. There are
changes that are made, corrections that are made. There are a
number of suggestions to clarify certain points. Then we have a




40

final set of minutes which are those minutes which are released to
the public 6 weeks, generally, after the meeting itself.
Mr. H inch ey . S o the members in attendance then have an oppor­
tunity to edit the minutes before they are released?
Mr. G reen sp a n . That is correct.

Mr. HlNCHEY. With regard to the memorandum of understanding
or memorandum of discussion, rather, that was available prior to
1976 or 1977, precisely what did that memorandum contain? Was
that a verbatim release of what took place? Was it rough minutes?
How would you describe it?
Mr. G reen sp a n . It was a fairly detailed memorandum. In fact,
maybe it would be better if I asked President Boehne. who was ac­
tually present at those times, to describe exactly wnat they are,
and lie could probably do it better from memoiy than I can from
nonexperience.
Mr. B oe h n e . It would be hard to top your ability to do that sort
of thing, Mr. Chairman, but let me try. What those memoranda
were, they are not verbatim, but they went through and described
the individual positions in a sequential way, ana they were per­
haps—I am really guessing now, but I would guess they would run
maybe 150 pages or something like that for a typical meeting and
they were released with a 5-year lag, although there were a num­
ber of things that were taken out, particularly involving relation­
ships with foreign central banks and other kinds of information
that might damage individual firms or companies or banks or that
sort of thing.
Mr. H inch ey . Even after 5 years there was a danger that that
might occur?
Mr. B oeh ne . In terms of some o f the ongoing relationships, par­
ticularly in the foreign area, I think that was the judgm ent at the
time.
Mr. G reen sp an . In my comment that—minutes are not made

available by other central banks, and that the Bundesbank, for ex­
ample, makes its minutes available, I believe, 30 years after the ac­
tual event. So the amount of disclosure which occurs by the Federal
Reserve is far above any disclosures made by other central banks
amongst the industrial countries.
Mr. H in ch ey . But it is less so than it was prior to 1976 and
1977?
Mr. G reen sp an . In the sense that we make—I would suspect
that our actual minutes now are more inclusive than they used to
be, and far more representative of the substance of the discussion.
But they are not as long and detailed as the memoranda of discus­
sion that existed 15 or 17 years ago and earlier.
Frankly, I would suspect the person who wanted to find out what
happened at an FOMC meeting would learn far more from the min­
utes we produce today than having to plow through one of those
memoranda of discussion of an earlier period.
It is probably useful for scholars who are very interested in the
extreme detail of the deliberations, but I will tell you, if the pur­
pose is to find out what happened, that is not the best way to do
it.
Mr. H in ch ey . So, Mr. Chairman, is it true, then, that as a means
perhaps in part to compensate for the elimination of the detailed




41

memorandum of discussion, the elimination of that in part, the ra­
tionale— since that was done—let me rephrase the question. Since
that was done at some point in 1976 or 1977, in order to com­
pensate for that absence now, the minutes that are produced on a
monthly basis are more detailed than they would have been prior
to that?
Mr. G reen sp an . I think that is true.
Mr. B o eh n e. That is correct. What is now put out is more de­
tailed than was put out pre-1976, and also is released more
promptly. And I think in a much more usable fashion. If one wants
to go back and look at what happened at a particular policy meet­
ing, I, for one, would prefer to read the minutes that we now
produce than to plow through those old memoranda of discussion,
just in terms of practical-----Mr. H in ch ey. Might I ask just one more brief question? I notice
that in the minutes you provided, as appended to your testimony,
Mr. Chairman, there is some discussion about events that took
place and various things that are said, but it doesn’t attribute the
statements to any particular member. What is the reason for that?
Mr. G reen sp an . There is a good reason for that. First of all, let
me say there are two positions one takes at these meetings. You
are either in favor of the final result, meaning you are part of the
majority, or you are in the minority. We try to explain in some de­
tail the rationale that has been developed during the meeting by
those who eventually voted for it. So in that sense, each member
of the majority is essentially subscribing to the views that are in­
volved in that decision.
Those who dissent, for whatever reason, write special dissents
specifically. The reason why we emphasize the overall view of the
committee is that this by statute is a committee, not a group of in­
dividuals, and that we have responsibilities as a committee and are
held responsible to the Congress for what it is we do as a commit­
tee, not as individuals.
Mr. H in ch ey. But isn’t it true the committee is influenced or
may be by statements that are made by individual members of the
committee? That is the purpose of the discussion, and although one
sees the vote, those who voted for and against, those who voted for,
particularly, for example, with regard to the discussion of M l, M2,
and M3 that took place at the meeting that is reported in the Feb­
ruary meeting, certain people may have been influenced by state­
ments made by others at that meeting and they may have voted
on the basis of those statements.
Isn’t it instructive to know who is influencing people to vote a
certain way?
Mr. G reen sp a n . That is difficult to do even in the memorandum
of discussion, because what it is that creates changes in points of
view or why people come out in certain ways is not always that
clear. Sometimes in the discussion somebody will say, I agree with
that or I don’t agree with that, or I see what you mean or some­
thing of that nature. What we would actually need is a different
type of set of minutes that would not express what the committee
is doing, and in that regard we have discussed this and looked at
it at great length and have concluded that it is important that we
emphasize what the consensus of the committee is, because that is




42

where the action and the directive comes from, and for which we
are held responsible as a group.
And I think that if we endeavor to start to separate this group
into individuals, we would lose the strain of the importance of
being a committee as differentiated from the individual members
themselves.
Mr. H in ch ey . Thank you, Mr. Chairman.
The Chairm an. May I just add one thing here, to clarify, with
respect to the Bundesbank, they report to the press immediately
after their meeting regarding their decisions.
Mr. G reen sp a n . They report their decisions, but they do not re­
port their deliberations.
The Chairm an. Well, no, we are not talking about the same
thing, though. Unlike the case of the Open Market Committee, you
are not saying their decisions are reported immediately.
Mr. G reen sp an . I am basically saying you don’t know what the
vote of the Bundesbank Council is for a very long period of time.
They don’t say who voted for what. All you get is the final conclu­
sion.
The Chairm an. I don't want to go into it, but there is a vast dif­
ference between the culture and the historical association of that
class of banker in a country like Germany and ours. The bankers
in a country like Germany look upon themselves as part of the offi­
cialdom of the administration. And I don’t think we have that tra­
dition in our country. But I don’t want to get into that.
I want to thank you for giving me the opportunity to interject.
Mr. Ridge.
Mr. R idge. Thank you very much, Mr. Chairman. Chairman
Greenspan, obviously from the comments of some of my colleagues
and some of the legislative initiatives, there is some concern about
the mystique surrounding the environment with which the Open
Market Committee operates. As my colleague at the left was con­
cerned about, an increasing interest in the body politic of more sun­
shine, greater disclosure, that is the political side of the discussion.
The policy side of the discussion, I think, recognizes the legiti­
mate need to keep the different contingencies that you had dis­
cussed, some of the confidential information you glean from those
involved in the economy within the region that helps you come to
the conclusions or certainly enables you to draw on information in
the marketplace to deliberate and then make some decisions. So we
are trying to balance the public’s right to know with your need to
make some fundamental monetary policy decisions. And I under­
stand that, but I am very interested from your perspective in learn­
ing whether or not the manner in which you deal with the question
of public access to monetary policy decisions differs from other
central banks.
And to the extent that it differs, are there any lessons to be
drawn from the experience of other central banks where they may
have provided either by design or unintentionally earlier access to
the information involving your deliberations or accidental access as
it affects monetary policy or minimizing inflation?
Can we look to the central banks in other industrialized democ­
racies and draw any conclusion if the manner of dealing with this
differs from ours?




43

Mr. G reen sp a n . We are so far ahead in the issue of disclosure
and indicating to the public what we do and why we do it and who
votes what on various different directives, that there is almost no
comparison. The general culture of central banking outside the
United States has far, far less elements of openness than we have.
It is part of their culture, as the chairman says. So I don’t nec­
essarily think that we should be endeavoring to view essentially
what others do as a model for what we do. We nave a different type
of culture. It is a far more open one.
And that is reflected in our central bank as well. The trouble, un­
fortunately, is that central banking by its nature cannot be open,
fully open, without undermining our capability to implement our
role as described by the law. It is a terrible dilemma that we have,
and I personally, in fact, all of my colleagues believe that we would
like to have everything out in the open. The only trouble is were
we to do that we wouldn’t be able to do our jobs. So it is a very
delicate and difficult balance that we believe that we at the central
bank in conjunction with the Congress over the years have accom­
plished—a fairly reasonable balance that I think balances our cul­
ture on the one hand, and the necessity of operating in markets on
the other.
I don’t think that tradeoff even remotely resembles that which
exists in any other industrial countiy.
Mr. R idge. Are there any examples of which you are aware
where the public or the marketplace in any of the industrial coun­
tries may have gained access, not through appropriate public dis­
closure, but through leaks of the sort that had an adverse impact
on the marketplace?
Mr. G reen sp a n . I assume they go on from time to time. Any in­
stitution which has got large numbers of people will tend to do
that. The difference, however, is that in many of those institutions
there is a single Governor and a Deputy Governor and very few
people who are involved in the process, and hence the probability
of leaks are much lower than where you have a large number of
people involved.
Mr. R idge. I appreciate that, I guess, and I apologize for being
late. As I gleaned through some o f your testimony and listened to
the few witnesses that I had an opportunity to hear, the contin­
gencies, the economic contingencies that you discuss and the infor­
mation that you share and tne dialog with which you engage and
challenge one another, it is your collective opinion that the public
disclosure of those contingencies or that confidential information,
and I suspect engaged dialog, in your judgment, would bring vola­
tility, far more volatility to the marketplace to outweigh the need
for us to see immediately the entire course of your deliberations?
Mr. G reen sp an . That is the judgment of this committee, and I
believe it is unanimous, unless I hear those who wish to dissent
from that, because we have discussed this issue at very consider­
able length. We have no vested interest in not disclosing what we
are doing as quickly as we can and as broadly as we can. The sole
reason why we choose not to is because we believe that the imple­
mentation of policy would be impaired.
Mr. R idge. Thank you, Mr. Chairman.
The Ch airm an . Thank you.




44

Mr. Fingerhut.
Mr. F in g e r h u t. Thank you, Mr. Chairman. Mr. Chairman, I do
have an opening statement I would like to submit for the record,
with your permission.
The C h airm an . Certainly.

[The prepared statement of Mr. Fingerhut can be found in the
appendix.]
Mr. F in g e r h u t. I would say that based on what I had heard at
the beginning of these hearings, I would associate myself with
some of Mr. Neal’s opening comments, both with respect to the sub­
ject of the hearing and also his other resolutions.
I have enjoyed these hearings, Mr. Chairman, and I appreciate
you calling them, because it is an extraordinary opportunity for
someone new to this committee both to have an exchange with the
Chairman of the Federal Reserve and now to do so with all the
members of the Federal Open Market Committee.
Last week, Chairman Greenspan, we talked about the coordina­
tion of fiscal and monetary policy, and you, on the record, and I ap­
preciate it, were very open about the extent to which you do meet
with the relevant persons in the administration who are charged
with developing fiscal policy. And I, in fact, commend you and the
administration because we have seen a coordination between fiscal
and monetary policy over the last period of months that is better
than some of the times in our history.
Having the rest of the members of the committee here today,
though, prompts me to take the question a step further. While we
tend to report our economic results on a nationwide basis, we know
that we are, in fact, a very diverse nation, and that often the re­
sults that make the headlines in the Wall Street Journal are a
compendium where, in fact, some areas are doing very well and
some areas are not doing as well as they should be.
I would be interested in any comments, and I will just turn my
time over to the panel, as to how we do and how we can improve
our coordination of technical fiscal and monetary policy, and indeed
the broader range of actions we take here in the Congress on a re­
gional level, so the sustained growth we all are seeking is one that
is spread equally throughout the country.
Mr. S y ro n . May I try answering that question? I think your
question is a very apt one particularly at this point in time, be­
cause we all collect data on what happens in our regions. Actually,
if you look at this recession's recovery period, you’ll notice that the
variance in regional economic performance is very, very dramatic.
In some places you would hardly know there had been a reces­
sion. In some cases, which unfortunately, includes my district, you
would hardly know there has been a recovery. This type of transi­
tional situation underscores one of the great values of the system,
when published information is not adequate, we have the ability to
gather information on an anecdotal basis and get a better feel for
what is happening.
While the most important determinant of what happens to any
part of the country is the national economy as a whole, another
value of the regional system that it is completely consistent with
the Federal system of government we have, is the input of all parts




45

of the countiy in deciding what melded policy on a crudely average
basis is best for the Nation as a whole.
Other countries have had policies o f different kinds to deal with
distressed versus nondistressed regions. The history o f success o f
that approach is mixed at best. O ur approach o f establishing a
com m on national policy, taking into consideration regional dif­
ferences, has really worked out quite well in an overall sense.
Mr. M cT e e r. Can I just add a footnote to that? To tie together

your comments about regional differences in the country, a district,
and the question of release of information, we do what they call a
beige book, which is the result of a very extensive set of interviews
with various sources by each Federal Reserve Bank and we actu­
ally publish all of that material that goes into the beige book prior
to the FOMC meeting so the public has that even before we get to­
gether, to me, just a footnote.
Mr. HOENIG. I think bringing regions to the meetings is very,
very important in terms of bringing the differences that occur
around the country together and forming monetary policy. As far
as the coordination with fiscal policy, though, you do not want 12
regions trying to coordinate fiscal policy with people.
I think that is why you bring it to the Open Market Committee,
and why it goes to the Chairman, who then has the best means of
informing and so forth in the right context.
So it is important we bring it together, but how we coordinate,
I think, has to be done very, very carefully.
Mr. F in g e rh u t. I appreciate all of the answers.
The Chairm an. The time of the gentleman has expired. We have
another panel following.
Mr. K n o lle n b e r g . Thank you, Mr. Chairman. I must be the last
one, looking around. I appreciate the testimony of this panel, espe­
cially Chairman Greenspan. You have been here a number times
and it is a pleasure to see you come back each time.
There are proposals that are being tossed about regarding more
closely tying the FOMC and the Fed to each administration, and
we have heard some comment about you folks being the foxes that
guard the chicken house, I don’t especially believe that.
In fact, if you look, the chickens seem to be in pretty good shape,
so I would say you are doing your job very adequately. As I have
said before, you are probably the envy of the rest of the world.
There is a lurking feeling out there, and it has been talked about
by a couple of my colleagues, as to getting things out in the open,
the sunshine. Congress seems to, of course, hear a lot about that
of late. The 14-year terms are one thing I hear about from my con­
stituency. Is there anything magic about 14 years? This is ad­
dressed to you, Chairman Greenspan, in the time that remains, but
is there anything magic about those 14 years?
Could it be shortened to 4 years or 6 years? Would that, in fact,
do anything to alter the process, and your success rate?
Mr. G reen span . Well, let me say, Congressman, that the 14-year
term was something that was compromised out in the original act
in 1913 in an endeavor to insulate the members of the Federal Re­
serve Board from political—from short-term political pressures, and
to effectively spread out the appointment process of each individual




46

President of the United States. So in that sense, is there a magic
element involved? Obviously not.
Clearly, it could be shorter or it could be longer. That is a judg­
ment that the Congress has to make. As a practical matter, few of
us actually serve the 14 years. So it is not a practical issue. It is
an issue more of statute than it is for implementation.
I call on my other colleagues to make other statements they
would like to make.
Mr. K n o lle n b e r g . Before you get to that, would you have any—
I assume, and I shouldn't assume, I guess, but I assume you would
feel differently about appointing the Fed Chairman at the com­
mencement of a President’s term.
Mr. G reen sp an . I must admit I go back and forth on this par­
ticular question, because there are pluses and minuses as to when
the Chairman and the Vice Chairman of the Federal Reserve Board
are chosen. And it is very rare that I don’t have an opinion strongly
on one side or another. But the weight of evidence on both sides
of this argument are as balanced as I remember any particular
public policy issue getting.
Mr. K n o lle n b e r g . In the time remaining, anybody else want to
chime in and offer a comment? I assume you speak for the group.
Then in that case I will conclude my questioning and I thank you,
Mr. Chairman, for bringing these folks in. Thank you very much.
The C hairm an. Thank you.
Mr. G reen sp a n . Mr. Chairman, one of my staff has informed me,
and I would correct this for the record, the 14-year term goes back
to the 1930’s, not to 1913. So I amend my statement accordingly.
Mr. K nollen berg . Y ou stand corrected.

The Chairm an. Gentlemen, thank you. Mr. Leach has requested
1 minute for, I guess, a summation.
Mr. L ea ch . Not a summation, but in our booklets we have a
statement from David Mullins, and I would like to ask unanimous
consent that it be presented for the record as well.
The C h airm an . W ithout objection.

[The prepared statement of Mr. Mullins can be found in the
appendix.]
Mr. L ea ch . Second, I want to respond from a personal perspec­
tive on the Open Market Committee issue. There has been a very
emotive response from one of the Federal Reserve Bank presidents,
but let me as carefully as I can say that the policies of the Federal
Reserve Board of the United States of America, when it comes to
regulation, have had multi-billion-dollar implications for the fiscal
policy of the United States; that is, the LDC lending circumstance
which was partly regulatorv-oriented decisionmaking, has caused
us to write off billions of dollars of public debt.
I raise this because we have a circumstance in America today
that for the first time in the last 50 years, Federal Reserve Board
regulated institutions have lower—lower, I repeat—capital ratios
required than State-regulated institutions. By historical perspec­
tive, I think it very important that the Congress of the United
States note that the independence of the Federal Reserve System
is the tradition and the history of 20th century America. The Fed­
eral Reserve Board has a marvelous record which this Congress




47

must honor. But not all aspects of this record have been or are per­
fect.
The C ha ir m an . Thank you very much. Mr. Neal is recognized for
unanimous consent request.
Mr. N e a l . I just wanted to ask that the rest of you, if you would,
comment to me and for the record on these two questions; whether
or not you agree that price stability is the best policy for the Fed,
and whether or not you think the Fed should be held accountable
for achieving and maintaining that policy by legislation.
The C h a ir m an . Mr. Neal, the Chair had indicated that when we
recognized you, your time was up; and any additional participation
by any Member be submitted in writing for the record. Also, every
member of the committee, both present and absent, is given unani­
mous consent to submit written questions to the members of this
panel, provided they do so by the time you receive the transcript
of the proceedings.
Gentlemen, tnank you very much, and lady. Thank you very,
very much.
We have another panel, and I must apologize for the time they
have had to sit all morning long, but it is a very important panel,
and one to which I want to offer my profound personal thanks for
their constant cooperation with us.
It consists of the famous and internationally known Anna
Schwartz of the National Bureau of Economic Research; Mr. James
Meigs, economist for the First Interstate Bank Corp., and Mr. Rob­
ert Craven, Fixed Income Management Group. Thank you very
much.
Dr. Schwartz, I particularly want to thank you for your constant
help to the committee and some subcommittees. I understand you
have a time problem, and I can appreciate that, given the length
of time you have had to sit here this morning.
STATEMENT OF ANNA SCHWARTZ, RESEARCH ASSOCIATE,
NATIONAL BUREAU OF ECONOMIC RESEARCH

Dr. S chw artz . Thank you, Mr. Chairman. I am here to comment
on two provisions in section 4 of H.R. 28 relating to prompt public
disclosure of Federal Open Market Committee meetings. One provi­
sion would require the Federal Reserve to videotape and transcribe
FOMC meetings and to make the videotape and transcription pub­
lic within 60 days after a meeting. Another provision would require
the Federal Reserve to make public within a week of an FOMC
meeting the domestic policy directive voted upon and issued to the
trading desk in New York after each FOMC meeting.
Let me first discuss the provision regarding the maintenance of
detailed records of Federal Open Market Committee deliberations
and their public disclosure.
To gain some perspective on this provision, it is helpful to trace
historical developments on the availability to the public of informa­
tion on the Federal Reserve’s conduct of monetary policy through
its purchases and sales of open market securities. Three subperiods
may be distinguished on this matter in the Federal Reserve’s
history.




48

The first period was before 1936. The second period was from
1936 through March 1975. And the final period is the one since
March 1975.
In the period before 1936, abbreviated minutes of Open Market
Committee meetings beginning in 1922 were maintained, but re­
stricted to internal use. Information on the Federal Reserve’s ac­
tivities is, however, available in two sources; one, the Library of
Congress for the diaries of Charles Hamlin, a member of the Fed­
eral Reserve Board from 1914 to 1936, and Columbia University for
the papers of George Harrison, a Governor and then president of
the New York Fed from 1928 to 1940.
Charles Hamlin recorded his observations on the views of impor­
tant Federal Reserve personalities and on the pressure of events on
the decisions reached by the Board. The Harrison papers contain
a wealth of documentary evidence, including the minutes of Open
Market Committee meetings, official correspondence, memoranda
exchanged in connection with those meetings, minutes of the meet­
ings of the board of directors of the New York Fed at which system
policy was analyzed, and a full record of Harrison’s conversations
with leading figures in the system.
In the second period, March 1936 through March 1976, detailed
minutes or memoranda of discussion were prepared for each FOMC
meeting. Before 1965 these records were held to be confidential
documents. In 1964 the FOMC adopted a policy to release minutes
of each meeting held through 1960 and for the release of minutes
for subsequent meetings with a 5-year lag after the calendar year
in which the minutes were taken.
This action by the FOMC was a response to congressional re­
quests in the early 1960’s for FOMC minutes and the publication
in 1963 of a monetary history of the United States, from 1867 to
1960, of which Milton Friedman and I were coauthors. While the
book was in draft, we sought but were denied access to the minutes
of the FOMC by the Federal Reserve at that time. We had to sub­
stitute the Hamlin diaries and the Harrison papers for the period
they covered.
By 1964, despite its refusal 2 years earlier to let us see minutes
of meetings, the FOMC apparently decided that disclosure of the
minutes after a 5-year lag posed no threat to the Fed.
In May 1976, the FOMC announced that after the March 15-16
meeting, memoranda of discussion would be discontinued, and the
views of individual participants expressed at FOMC meetings
would no longer be documented. The announcement apparently
was inspired by the adoption of the Freedom of Information Act
and the Sunshine Act that made it difficult for the Federal Reserve
to maintain confidential and secret information.
The March 1975 meeting of the FOMC is the last one to date of
which minutes have been made public.
I favor reinstatement by the FOMC of its former practice of
maintaining detailed minutes of its meetings and publication of the
record after a fixed period of time to protect the Federal Reserve
against premature disclosure of ongoing, unsettled issues. The
record should be verbatim. A videotape is neither essential nor de­
sirable. The record should be verbatim subject to correction within
a brief period by the participants for inadvertently misspeaking.




49

If the Federal Reserve regards 60 days as to short a delay for
publication, I would not object to lengthening the delay to 1 year
for a full record of the minutes of a meeting.
Absence of the minutes of meetings since March 1975 has de­
prived scholars of information on the formation of monetary policy
and limits research. I am familiar with a recent proposal by a wellknown scholar to study Federal Reserve performance in recent dec­
ades. That scholar intends to resort to interviews with former Fed­
eral Reserve officials as a substitute for the unavailable minutes
since 1975. The better course would be for the Federal Reserve to
publish whatever documentation it has maintained for each meet­
ing in the period since 1976.
Let me now discuss the question of the appropriate length of
delay of the release of the FOMC domestic policy directive. Current
)ractice, which began in 1976, is for directives to be released after
inancial markets close on the Friday after the subsequent FOMC
meeting. This is a lag of approximately 45 days after the meeting
at whicn the directive was adopted and after another directive has
been adopted. The directive that is released is always an outdated
one.
The position of the Federal Reserve is that early release would
harm its ability to conduct monetary policy and the government’s
commercial interests. It has asserted that prompt release of the di­
rective would have an announcement effect on financial markets.
Market participants would hasten to realize gains in anticipation
of the Federal Open Market Committee’s purchases or sales of se­
curities that would lead to substantial additional costs for the gov­
ernment’s debt financing.
The Federal Reserve argument boils down to the claim that
prompt release would cause increased interest rate volatility that
would raise the average level of interest rates. Is there evidence to
support these claims?
Although official release of the directive is delayed for approxi­
mately 45 days, the Wall Street Journal has reported the contents
of the directive within a week of each of 11 FOMC meetings out
of the 34 meetings that took place between March 1989 and May
1993. These are leaks that the newspaper attributes to, quote,
“government officials,” or “people familiar with the Fed’s delibera­
tions.” The newspaper articles correspond closely with the FOMC
directives that were later published.
Prof. Michael T. Belongia of the University of Mississippi and his
coauthor, Kevin Kliesen, have analyzed the 11 leaks as if they rep­
resented the immediate release of the directive. The authors exam­
ine changes in the Treasury bill rate on each of 5 days before and
5 days after the Wall Street Journal story appeared to see if the
T-bill rate changes support the Federal Reserve’s argument that
the early release of the content of the directive would be associated
with increased volatility in short-term interest rates.
The authors find that any such effect was negligible even when
the directive contradicted expectations based on current market
rates. Moreover, even if there were large responses of interest rates
to each of the 34 directives since 1989 on the assumption that they
contained news different from existing market expectations, the in­
crease in variance was numerically small.

S




50

Belongia and Kliesen also raised doubts that increased volatility
of the limited magnitude they find around the dates of leaks would
raise the average level of interest rates on all other days.
I reach two conclusions. One is that the Fed would be better ad­
vised to release the directive promptly instead of selectively leaking
its content. Market participants scrutinize every scrap of informa­
tion on prospective Federal Reserve actions. The market will per­
form better if the scrutiny is based on the actual directive, however
Delphic its content, rather than on rumors and conjectures about
the directive. It is hard to accept the view that markets perform
better the less information they have.
My second conclusion is that the Fed is needlessly concerned
about the supposed disturbing effects of prompt release of the di­
rective on volatility and the level of interest rates.
If FOMC meetings were held on Thursday and Friday and par­
ticipants had an opportunity over the weekend to review the ver­
batim record to correct instances in which they misspoke, the Fed
could then release the domestic policy record and this abbreviated
information record on Monday morning when U.S. markets opened.
Finally, let me say that these hearings are devoted to peripheral
aspects of Federal Reserve operations. The hearings do not touch
on the substantive questions: What are the Fed’s objectives? How
effective are the operating procedures it follows to achieve its objec­
tives?
So I applaud the legislation that Congressman Neal is proposing
that price level stability should be the sole Fed objective. Thank
you.
The C hairm an. Mr. Meigs.
STATEMENT OF JAMES MEIGS, SENIOR VICE PRESIDENT AND
CHIEF ECONOMIST, FIRST INTERSTATE BANK CORP.

Mr. M eigs, Mr. Chairman, members of the committee, it is an
honor for me to appear before you to express my views on this im­
portant matter. I am familiar with the materials we have been dis­
cussing, the policy record, and the proceedings, because I used
them for many years in three capacities: One, as an economist at
the Federal Reserve Bank, where we were providing analytical sup­
port for the president of our bank in preparing for meetings of the
Open Market Committee; second, as a researcher, writing and lec­
turing on money and banking, monetary policy, and world financial
markets; and third, as an economist or consultant for banks, secu­
rities firms, savings and loan associations, and other institutions.
I have had no experience in the oversight role implied by Con­
gress’ power to coin money and regulate tne value thereof, in arti­
cle 1, section 8, clause 5, of the U.S. Constitution. However, I think
my recommendations may be helpful to you in that function.
I have three recommendations. One, the Federal Reserve should
publish the policy record of the Federal Open Market Committee
within 1 or 2 days after each meeting of the committee. The policy
record should clearly state any changes in policy and the reasons
for the changes.
Second, the FOMC should resume the practice discontinued in
1976 of having the committee secretary prepare a memorandum of




51

discussion for each meeting, the minutes. The memorandum of dis­
cussion should be released to the public after no more than 1 year.
The third recommendation is that the Congress should provide a
clear mandate for the Federal Reserve to pursue a stable price
level for the U.S. economy, that is, to regulate the value of money.
This Banking Committee then could concentrate on holding the
Federal Reserve accountable for how it carries out that delegated
responsibility.
In the rest of the statement, I plan to state some of the reasons
for these arguments. On the policy record, at the end of my state­
ment for hearings of this committee on September 11, 1973, I said,
“My one additional suggestion is to eliminate the secrecy that now
cloaks the processes and decisions of the Board of Governors and
the Open Market Committee. I see no reason why policy directives
of the Open Market Committee should not be publicly announced
immediately after each meeting of the committee, preferably with
a discussion of the reasons for policy decisions. Ending the secrecy
would not only facilitate the monitoring of System actions by the
President ana the Congress, but it would greatly reduce uncer­
tainty among the general public.”
At the time I wrote that, I was advising clients at banks and
other financial firms. My inability to provide them with more near­
ly current information on Federal Reserve policies was extremely
frustrating. Now, 20 years later, I am even more firmly convinced
that the policy record should be released immediately after each
meeting.
Participants in United States and world financial markets are as
skittish as gazelles drinking from a river infested with crocodiles.
Over the last 20 years, they have invested vast resources in equip­
ment and techniques designed to shorten the time they need to
react to new information about economic policies and prospects.
They especially would like to know what the FOMC decides about
policy at each meeting and what circumstances might lead to a
change at future meetings or in the period between meetings. The
slightest hint of a change in U.S. monetary policies can affect secu­
rities prices and exchange rates around the world within minutes.
These well-known facts about financial markets* sensitivity to
changes in the Federal Reserve policy have been used in arguing
for delay in releasing the policy record in order to avoid destabiliz­
ing financial markets. I believe to the contrary that the effects of
reducing the delay in releasing the policy record would be in the
other direction. Immediate or early release would exert a stabiliz­
ing influence on financial markets by reducing uncertainty. That
does not necessarily mean the markets would not jump when a new
issue of the policy record announces a policy change. People with
their own or client's money at risk adjust quickly to any announced
or suspected policy change.
Market jumps in reaction to early policy record releases might
embarrass the policymakers, especially when interest rates or ex­
change rates shift in an unpopular direction. But the markets
would be more likely to jump in a direction that would be consist­
ent with Federal Reserve policy objectives than when the markets
react to rumors, leaks, innuendo, or conjectures which later prove
to be unfounded. It would be better to provide the markets with the




52

truth—whether potentially disturbing or not—and let them sort it
out.
Early release of the policy record would have the further virtue
of leveling the playing field. Some market players now are believed
to have better access to information on Federal Reserve policy than
others do. This obviouslv causes hard feelings or worse at times
when some institutions believe competitors receive valuable infor­
mation from Federal Reserve sources sooner than they do. The pol­
icy record should be thrown on the table for everybody at once as
soon as the facts are in, like a crop report.
The memoranda of discussion are the minutes we have talked
about quite a bit this morning. The memoranda of discussion that
were discontinued in 1976 provided fascinating insights into FOMC
policymaking procedures, although with an intolerably long delay.
A new series of minutes or memoranda of discussion released with
less delay would be extremely useful to future policymakers, re­
searchers and market practitioners.
Chairman Arthur Burns told the Subcommittee on Domestic
Monetary Policy in 1977 that he thought a bill to require the
FOMC to maintain detailed minutes and to publish them after 3
years was “clearly motivated by a concern for the interests of schol­
ars and others who may have occasion to do historical research in
the area of monetary policy ”
Numerous other researchers and I had written to the committee
to express various degrees of anguish over losing the memoranda
of discussion. So he thought he was replying to the scholars out
there, of whom there were very few. Chairman Burns conceded
that the newly revised and expanded policy record “does not pre­
serve a historical record as detailed as that contained in the earlier
memoranda of discussion.” While expressing his regret over no
longer producing FOMC minutes for scholars to mull over, Chair­
man Burns slighted a much more important group of readers.
He hardly mentioned members and staff of the Open Market
Committee and innumerable people throughout the system who
have to interpret, explain, and carry out monetary policy. For ex­
ample, at the Federal Reserve Bank of St. Louis, we used the draft
minutes of each meeting to help our president prepare for the next
meeting. One reason was that the economist who accompanied the
president to FOMC meetings seldom could take enough notes to
tell the rest of us who said what and why in a meeting of 12
Reserve Bank presidents, 7 board members, and several staff
advisers.
The point of this anecdote is that Federal Reserve views on how
monetary policy should be formulated and carried out, were evolv­
ing then at a rapid rate, as they still must be evolving now. There
was no clear manual of procedure for dealing with policy problems.
The FOMC was adapting to changing economic institutions, chang­
ing financial institutions, and changing doctrines in monetary eco­
nomics. Because the membership of the committee was continually
changing, the FOMC needed an institutional memoiy to organize
and to preserve this learning experience for future generations of
policymakers inside the Fed itself.
The memoranda of discussion provided a fine vehicle and repositoiy for the FOMC institutional memory. The memorandum for




53

each meeting recording the discussion was reviewed by the partici­
pants to guard against errors in transcription or wording and was
locked up in final form for posterity at the next meeting, usually
1 month later. As Dr. Schwartz said, years of such records of expe­
rience are now lacking, never to be retrieved, and these are years
of the most sweeping changes and conditions of monetary policy.
Keeping and publishing detailed minutes of FOMC meetings
would help answer three overriding questions. One, how do mem­
bers of the Federal Open Market Committee learn to exercise the
awesome powers delegated to them?
Two, how does a corporate body made up of ever-changing indi­
vidual members remember and employ what it learns from its mis­
takes and successes?
Three, how can the government that delegated those powers
oversee the performance of their stewards?
Former Reserve Board member and Vice Chairman J.L. Robert­
son summed up these issues in a letter to the chairman of the Sub­
committee on Domestic Monetary Policy in 1976, Chairman Neal at
that time. He said—and he was a veiy outstanding and articulate
Governor—“In my view, the formulation of monetary policy by the
Open Market Committee is one of the most important factors influ­
encing the economy. Hence, it should be mandatory that there be
kept a detailed record, to be made available to Congress and the
public, after a lapse of appropriate time.”
He went on to say, “If minutes of the meetings are not kept and
eventually made available, there would be no possible way for the
Congress or members of the public to appraise the contribution of
any member of the committee to the formulation of monetary pol­
icy. Such appraisals are essential to any study of how to improve
the system.”
Governor Robertson also answered the question which came up
over and over and over and over again this morning, of whether
knowing they were on public record would inhibit members willing­
ness to speak frankly in FOMC meetings.
He said, and I quote, “Men competent to serve in these positions
should be willing and anxious to stand on their records and be held
responsible for the way in which they play their respective roles.”
The men and women who serve on the FOMC today and those
who will serve in the future should not be reluctant to go on record.
Each will be backed up by some of the most competent economists
in the world. Each one will already have won distinction as a
responsible professional in some capacity before joining the
committee.
I would suggest that any committee member who is afraid his or
her statements might not stand up to the tests of time or outside
view should either put more thought into the statements or seek
a less demanding line of work.
Now we come to what I think is a crucial recommendation, which
I would call a mandate for the Federal Reserve.
When considering the use of the minutes and other information
from the Federal Reserve for establishing accountability one must
ask, accountability for what? Most treatises on responsibility and
accountability in business, government, and the military stress the




54

need for a clear statement of the responsibility or mission for which
an individual or an organization can be held accountable.
Such a statement or mandate is lacking here. After 200 years of
constitutional history, we still have not clearly decided what the
mandate for control of the money power is or where it resides.
The Federal Reserve System and most other central banks pur­
sue multiple objectives at the same time, economic growth, employ­
ment, price stability, interest rates, and exchange rates and others.
Experience of many years and many countries demonstrates that
it is impossible to achieve all of the objectives set by central banks
and the governments simultaneously.
In operating and in reporting to the governments and the public,
it is agonizingly difficult for the central banks to decide which ob­
jective or objectives to stress.
Consequently, there is an inflationary bias in monetary policies
o f m any countries that is extremely difficult to counteract.

Most important, there is no simple tradeoff that would permit
central banks and governments to achieve higher real economic
growth by tolerating more inflation. Instead, a stable price level
would provide the best possible foundation for maximizing opportu­
nities for increasing employment and real incomes.
Now, this Congress could cut the knot by instructing the Federal
Reserve to maintain a stable price level—zero inflation—to regu­
late the value of the money. That is, the Congress could tell the
Federal Reserve to do something it can do and that would have a
tangible, measurable result.
The Federal Reserve could then concentrate on learning how to
do that and doing it. The Congress could hold the Federal Reserve
accountable for carrying out that responsibility.
The Congress could and should examine all information coming
from the FOMC, including the memoranda of discussion, and the
policy record, to assure itself and the public that the value of
money is well regulated. The voters ultimately would hold both of
these bodies accountable for the results.
Thank you.
Chairman G o n z a le z . Thank you very much.
[The prepared statement of Mr. Meigs can be found in the
appendix.]
Mr. Craven.
STATEMENT OF ROBERT CRAVEN, FIXED INCOME
MANAGEMENT GROUP
Mr. C ra ven . Chairman Gonzalez, members o f the committee,
thank you for the opportunity to address you this morning.

Congressman Neal, as you stated, the Fed clearly has done a
good job and I would agree with you and I also would say it is easy
to be critical and I would like my comments today to be taken in
a constructive light
It is a very, very tough job that the policymakers are harnessed
to, I realize that, but it's a shame that they have chosen to cloak
their communication in what I feel is unnecessary secrecy. Some­
times it seems almost designed to confuse and mislead the market­
place.




55

It is as if I were a heart surgeon and I was here before you, I
could explain in two ways heart disease; one in medical terms,
which none of us would understand; and the other is that the mus­
cle is weak and the veins are clogged, and you would get the point.
When I look at the committee and I see few in attendance and
I am told—believe me I am very naive in the v/ays of Washington—
but I am told there are members who are intimidated by Fed lan­
guage, by the members of the Fed, and I understand that com­
pletely. I think that the Fed is guilty of using language to intimi­
date and that is something that I think needs serious attention.
I would like to testify on the impact of leaks on the financial
market as you asked me to do. I would like to expand also my com­
ments to include what I feel to be a general lack of central bank
control over the members use of the media, a lack of discipline, and
how that is detrimental to the marketplace and ultimately costly
to the taxpayer.
I am not here to solicit sympathy for the trading community be­
cause I don’t think they need it, but if we can draw the line to the
taxpayer maybe it makes more sense.
I would also like to suggest that procedure be improved as Dr.
Schwartz and Jim Meigs have done, regarding dissemination of
Fed policy.
My presentation is in three parts. The first concerns leaks of the
outcome of the deliberations, that is the vote, and the turmoil
caused by those leaks, the extreme volatility. I use the term vio­
lence in fact in the marketplace. As a result of these leaks, a pre­
mium of uncertainty is built into the interest rates (meaning high­
er) and the burden is carried by the taxpayer because of higher
Treasury borrowing costs when auctions take place near or around
the leak.
Two recent leaks will serve as examples and if I have time to
plow through them, I would like to.
Second, I would urge change in procedure surrounding the re­
lease of the minutes.
My view is that the directive should be released immediately
after deliberations; and second I would suggest that policy not be
changed until the next meeting and I would just brush on this be­
cause it represents a major change in Fed operating procedure, but
it dovetails with the discussion.
Last, other than leaks, under the Greenspan Fed, some policy­
makers use the media to air their own viewpoints even if at odds
with current Fed policy. This is my personal view. Some policy­
makers seem to be intent, at this particular time, on selling them­
selves through the media.
Second, general commentary is often ill informed and reckless.
Such commentary destabilizes the financial markets every bit as
much as the “leak.”
This loose cannon approach must be stopped. Although Green­
span pledged to stop the leaks after some urging by this committee,
he needs to enforce a measure of discipline on policymakers general
use of the media.
Let’s first address the leaks and I will skip some of this given
our time constraints. The leak of May 21, 1992, carried on pages
A2 and C20 of the Wall Street Journal—by the way, on several oc­




56

casions I have confronted the Journal and talked to the reporter
involved and, of course, the response is the same, that we are doing
our job. One wonders why Reuters and Dow Jones and KnightRidder are not doing their job?
This leak was carried first in the Asia edition of the Wall Street
Journal. This means that while U.S. traders were asleep, prices
dropped overnight on Euro and U.S. Treasury debt and fixed in­
come products in general, which are traded on a 24-hour basis.
Short-term rates jumped, and this will give you a very practical
view of the effects of a leak. Short-term rates jumped 15 to 25 basis
points, which means a quarter of 1 percent, early in the U.S. trad­
ing day, the first half hour or so. I will always remember because
it is branded on my soul, unfortunately. Bond yields, which had
closed at 7.77 percent the day before closed May 21 at 7.86.
Now let’s take this one more step.
One-year Treasury bill rates, that averaged 4.07 on May 20, a
day before, were 4.24 on May 21. In the scheme of things in fixed
income markets, a 4.07 to 4.24 in 1 day on Treasury bills is a very
extreme jump. Had Eurobills been auctioned that day this would
have cost the U.S. taxpayer an additional $24 million, which is 17
kicks or basis points on the average size of $14 billion, due to this
leak-induced spike in rates.
It was pure luck that the $10 million, 30-year issue which was
auctioned on May 7, was not auctioned on May 21. We would have
had then 30 years of additional cost.
I mention David Jones in the next statement. He is a wellregarded Fed watcher, if you like, and he works for a Wall Street
firm. His book, “Politics of Money, The Fed Under Alan Green­
span,” is a good one.
When referring to the turmoil from the Thanksgiving Day fiasco
in November 1989, he said that “The uncertainty almost certainly
was reflected in higher average Treasury borrowing costs in the pe­
riod immediately following the Thanksgiving fiasco, than otherwise
would have been the case.”
This so-called fiasco was not a leak, but it was a cause of
extreme volatility, because of a Fed miscue in open market
operations.
In addition the Wall Street Journal reporter or reporters didn’t
bother to talk to the Fed before reporting the story that the Fed
had eased. The Fed had not eased and through subsequent open
market operations indicated that, and the market settled back.
But the difference in these two is that the first was an honest
mistake. Leaks are not honest mistakes.
The end result is the same, however; extreme market volatility
and ultimately higher costs to the taxpayer.
Let’s examine one more leak. The infamous leak of May 24, 1993.
That was a very effective leak because through this leak, the Fed
told all of us that they are on the ball, they will snug at the first
indication of inflation.
It was in fact very effective. It put a cap on long-term rates by
saying the second we see any indication of an inflation problem, we
will snug.




57

The markets had taken a nosedive on May 21 just previous to
this date when minutes of the March meeting were released. So
there is an example of what might happen the day of release.
At any rate, on that day, rates on short-term debt jumped 10 to
15 basis points and bonds, after fluctuating wildly, closed a half
point lower in price. That was on the day of the leak. This story
was first carried again in the Asia edition of the Wall Street Jour­
nal. So when U.S. markets came to work, they saw significant
losses.
Approximately 12 billion 6-month bills were auctioned at an av­
erage rate of 3.19 percent versus 3.10 on May 17, at the previous
auction, for an additional cost of $11 million to the taxpayer.
It could be argued that all of that cost was not necessarily due
to that leak, but a good part of it was.
The leak was followed by a May 27 CNBC story, placed by a Fed
source, which gave an actual trigger for tightening; that is, if the
CPI goes up 0.04, we will snug. There was more violence in the
marketplace, higher rates.
Rates recovered from the May 24 leak, and then fluctuated wild­
ly. All this due to uncertainty. The 39 recognized dealers on Wall
Street, were extremely nervous. They are reluctant to inventory
debt, and that drives up rates.
Again pure luck that other scheduled U.S. Treasury debt did not
come on these days. We intend to study the amount of private debt
that is associated around the leak dates, and what additional costs
were incurred.
Had the 30-year bond issued on May 13 been auctioned May 31,
it could have cost the taxpayer $4 million to $12 million annually
for the next 30 years.
My view is not an extreme one.
Let’s look at another view. On July 6, speaking of this leak to
Market News Service, a reputable news organization, David Resler,
chief economist to Nomura Securities in New York stated, "To se­
lect particular news organizations to divulge the contents of the
meeting is criminal ana absolutely immoral. The offending mem­
bers should be subject to incredibly severe penalties, including
being expelled from the Federal Reserve System, at a minimum.
In light of the Fed’s leak to the Wall Street Journal, <
£
They might
as well own Dow Jones stock.”
Now, President Jordan said that the Fed—I don’t want to mis­
quote him here—“central banks don’t leak.”
Yet, Chairman Greenspan told us that he hopes the leaks are be­
hind us.
So there is some problem there.
Let’s go next to the minutes. As Anna Schwartz and Jim have
pointed out, the so-called minutes of deliberations are not real min­
utes. They are summaries of deliberations.
My view is different from Anna’s on release. I don’t really have
a problem with the full minutes being released at a later date but
I have a problem with the directive. The directive is the two- or
three-page summary to the New York Fed which says “Tell us if
the economy is hot, cold or in-between,” do this, this or this until
the next meeting. That is what I think should be released imme­
diately, as does Milton Friedman.




58

For example, the minutes for the meeting of August 17 go on for
14 pages. They can be longer. They say at the conclusion of the
meeting, ‘The Federal Reserve Bank of New York was authorized
and directed, until instructed otherwise to execute transactions in
the system account in accordance with the following directive,” and
the directive is about two pages. That is what we want released
immediately.
It is brief, gives the reason for the consensus and the action and
the vote. The release should be by way of a press statement. It is
true that BBK can release information immediately after meeting,
but it is at their own volition. They only do so at their own volition.
But what I feel is that the Fed must be compelled to release after
every meeting.
Milton Friedman has been a proponent of immediate release,
saying, “The whole thing is absurd and unnecessary.” In discussion
with my firm on October 13, he said he supports our view.
There is one change I might make to Anna Schwartz' view and
that is release on a Sunday night or Friday. These minutes I feel
must be released on a weekday and if released on a Sunday, again
the Asians and the European Community have a shot at our U.S.
rates. These are traded 24 hours. They are traded in FIMEX and
Japan. This information must be released early in the U.S. trading
day.
At that time, the Asian community is still trading and the Euro­
pean Community is still trading, so this is fair.
Chairman Greenspan's response to this argument as we have
heard here and as originally given to Congressman Neal in 1989
and repeated many times since is that the immediate release will
increase market volatility. The comment was spread through the
entire discussion, every single policymaker, that the problem is the
immediate release will increase volatility. But if anything, nothing
could be further from the truth.
Under the present system we have to live with leaks almost on
a weekly or monthly basis. We would much rather take our medi­
cine in the middle of the week after the FOMC and be done with
it.
The argument that immediate release would compromise the
market, it is, if anything, 180 degrees from the truth.
There is another problem surrounding the deliberations I would
like to address just for the record; that is, the intermeeting policy
changes. I think the intermeeting policy changes should be elimi­
nated. I think that they should say, “Look, here it is. This is the
nature of the economy. This is our feeling. Here is the directive to
the Board and that is it.”
The current system is that the Chairman within certain param­
eters is allowed to change policy intermeeting. This causes vola­
tility. Every time we have an economic number, we wonder wheth­
er this numbers will trigger a change. Over 30 percent of the last
2 V2 years of policy changes have been triggered right after a
nonpayroll number. They [Fed] often hinge on one number even
though they say they may not.
The marketplace tries to second-guess the Fed around every
housing number, ever retail sales number, ever payroll number. I
suggest the changes be limited only to the meeting date.




59

Last, many of these reports around which policies in fact hinge
are revised several times. That makes it even more confusing.
The Greenspan Fed is clearly a more democratic institution than
that under Paul Volcker. On its face, this is admirable, but as Mar­
tha Seeger said in referring to the Fed in the Wall Street Journal,
“democracy is messier than dictatorship.”
As a result, during the FOMC deliberations, we hear more than
ever—it seems to me more than ever before—from individual pol­
icymakers. This is very unfortunate. Policymaker statements in the
media are sometimes reckless, ill-advised, sometimes cheerleading,
and sometimes are politically motivated. All this adds unnecessary
volatility and confusion to the marketplace.
This can be traced back, ultimately, to the U.S. taxpayer.
In May 1992, as an example, at a Civil Rights Commission Con­
ference in Washington, the Commission suggested to Governor
Lindsey that U.S. manufacturing was in decline and Governor
Lindsey responded the manufacturing is “going like gangbusters.”
When the marketplace here that, that is important, rates move
on that type of comment. Governor Lindsey was quoted on May 13
as saying “The economy is moving along quite well.”
Again the market hinges on every single word these gentlemen
say.
Just to add to the confusion, on that same day, Richard Syron,
a voting member of the FOMC and president of the Boston Fed,
was on the news saying that “the recovery could fall apart.”
This is on the same day from two policymakers.
The market sold off on May 13 as a result of what we feel was
either cheerleading, which I tnink is an inappropriate use of the of­
fice; or a total lack of knowledge of the real sector.
I list for the record the actual economic numbers which I won’t
go through, but they were showing an economy with decreasing
vigor, an economy clearly slowing down and particularly manufac­
turing employment was indicated to be off. This was just preceding
the Governor s commentary.
Then economic numbers showed an even slower economy in
June. Direct Fed surveys, housing starts, manufacturing employ­
ment, again, all lower.
Finally the payroll number of July 2 was so weak the Fed cut
the discount rate and the Fed funds on the same date.
So again, this is misleading commentary.
This is not “going like gangbusters,” not an economy doing “quite
well,” and yet we are not just speaking of one opinion of one policy­
maker, but a policymaker whose commentary is taken to reflect the
view of the FOMC. That is my point, that such reckless com­
mentary leads to violence in the market, it leads to volatility in the
market, it leads to higher rates.
Shall I go on?
Chairman G on za lez. Sir, we have notice of a recorded vote and,
therefore, if you could summarize—we would be grateful to you.
Mr. C raven . I will do so.
Let me say that I feel like the policymakers, most of the policy­
makers have not been guilty of these offenses, and other situations
mentioned in the presentation, and they have the wisdom to keep
it zipped for lack of a better term, between the meetings.




60

Others have not.
Let me quote again from the Jones book, that some ambitious,
new breed Fed policymakers have, in competition with the Fed
Chairman, begun to effectively use the media and public relations
to sell themselves or their own ideas perhaps in seeking recognition
for future administration appointments to the Fed the Chairman’s
job itself or other key government positions, through background
press, and the infamous Washington leak they can advance their
own policy positions.
I would say in conclusion, there must be a return to discipline
at the Greenspan Fed.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Craven can be found in the
appendix.]
Chairman G o n z a le z . Thank you very much.
I thank each and every one of you. Members who have come in
and walked out and those who have not been able to be here, will
have questions that they will be submitting to you. Each has a copy
of your testimony. I will have only one question since I believe I
saw you all here during most of the testimony by the previous
panel.
In your opinion, and it is just your opinion, could all of the leaks
revealed today be possible without the knowledge of anyone on that
first panel?
Ms. S c h w a r tz . I think from the way the stories were reported
it was obvious that they came from some official source. I don’t
know who the official was.
Mr. M eigs. I don’t know how they did it but I agree with Anna,
that somebody very high in the system who knew what was going
on talked to a reporter, maybe the same one more than once, you
know. That is a favorite—I don’t want to make any invidious com­
ments about Washington, but there are those living in the rest of
the country who kina of think this is the way things are done a
lot in Washington. The leak is the source.
Now, I think it is valuable that we get the information however
we get it. I am not so—so I am sorry for the dealers who were
caugnt short, the people in Asia got the word before they did, but
it is just important to get the information out on what is the policy.
Without a mandate, a clear mandate on what the policy should be,
that expands the dimensions of all the possibilities that they react
to.
If they were pursuing a stable price level, policy would be set for
periods of years at a time, there wouldn’t be all this fancy maneu­
vering and changing and speculating and leaks; there wouldn’t be
needed.
Mr. C ra v en . I concur. The leaks clearly came from an official
source. In the last four or five—the wording of the last four or five
leaks clearly came from an official source.
Chairman G o n z a le z . Thank you Mr. Craven.
Mr. Neal.
Mr. N e a l. Yes, sir. I know we don’t have much time. I just
wanted to thank Dr. Schwartz for her endorsement of our bill.
Mr. Meigs, actually you didn’t mention my bill but you said the
same thing. So I thank you for the sentiments also.




61
Mr. M eigs. Yes.
Mr. N e a l. I remember, Dr. Schwartz, you were executive director

of the Gold Commission and I was one of our Banking Committee's
representative to that. I just want to thank all three of you for your
help this morning.
We don’t have time to get into any substance here, but I thank
you all very much.
Chairman G o n z a le z . Thank you, Mr. Neal.
You have been most patient. We have gone right through the
lunch period and it's a quarter of 2 o'clock, but I do want you to
know we are very grateful. Your help is a lot more valuable than
you may think and the presence or absence here of members
should not in any way detract from your impression that this com­
mittee is not interested.
Let me say that even in the present form, we have better than
a dozen cosponsors on this committee, on this bill. We have 21, Dr.
Auerbach tells me. Incidentally, I wish to thank him for putting
these meetings together. He is the main instrument and the com­
mittee is very fortunate to have him on leave from the university
and he at one time worked for the committee before so I think you
have met him. I just wanted to give him the credit that ought to
be his.
Thank you again very much.
The committee will stand adjourned until further call of the
Chair which will be our fourth meeting next week.
[Whereupon, at 1:50 p.m., the hearing was adjourned, to recon­
vene subject to the call of the Chair.]

73-208 0

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94-3










63

APPENDIX

October 19, 1993

64
Opening Statement
by
Henry B. Gonzalez
Chairman
Committee on Banking, Finance and Urban Affairs
October 19, 1993
Third Day of Hearings
on the Issues Involved in
the "Federal Reserve System Accountability Act of 1993" HR 28
ft*************************)!***)!')!'***)!'))!**************’)*
*
Today, the Banking Committee begins the third day of hearings on issues
involved in the "Federal Reserve System Accountability Act of 1993," HR 28. I
welcome Federal Reserve Chairman of the Board of Governors, Alan Greenspan;
Federal Reserve governors; and presidents of the Federal Reserve Banks. Chairman
Greenspan testified at our last hearing that everything proposed in our legislation,
HR 28, was a "major mistake." Today we are going to hear additional testimony
to see if our proposals are needed reforms or major mistakes. HR 28 requires that
the FOMC:
1)
2)

announce changes in its policy one week after its
meetings and that it
make public a complete record of those meetings
60 days after each meeting.

The central issue of today’s hearing is simple: Why is the Federal Reserve,
among all Federal agencies, exempt from keeping complete and accurate records?
If the White House, the Supreme Court, the Defense Department and every other
government agency keep accurate records of what they are doing, why not the
Federal Reserve? Are decisions by these parts of our government less sensitive than
those made at the Federal Reserve?
You distinguished gentlemen who serve as Federal Reserve presidents, did not
have to present your credentials and your views to the American public to secure
your seats on the FOMC. President Jordan has previously gone through the
confirmation process for his seat on the Reagan Council of Economic Advisors. I
hope today’s hearing will allow the citizens of our country to learn a little bit about
you and how independent your views really are.
I would like each of you to tell me if you think the following information is
of sufficient national importance to require recording and publication of minutes of
your FOMC meetings.
Last week at these hearings I cited FOMC minutes of two meetings prior to
the reelection of President Richard Nixon. Those minutes were released five years
after the FOMC meetings. Although he was warned that projections were for fast
money growth, Federal Reserve Chairman Arthur Burns had called for even faster
money growth at these meetings. Why shouldn’t the historical record reflect the
truth that Burns was pursuing an inflationary policy?




1

65

The importance of accurate minutes is reflected in the records of a
Philadelphia Federal Reserve Bank’s board of directors meeting. The minutes
reveal a possible cover-up by the Federal Reserve related to the Watergate burglary
in 1972. Recall the Watergate scandal that began with the break-in of the
Democratic National Committee offices in the Watergate office building on June 17,
1972. A dangerous political crisis rocked our country while Congress sought to
uncover the facts, including who financed the break-in. I read now from page 77
of the June 22, 1972 minutes of the Philadelphia Federal Reserve Bank’ s Board of
Directors meeting:
"Mr [X] reported that $6,300 in one hundred dollar bills
had been found on the persons arrested for breaking into
the Democratic National Committee headquarters in
Washington. The FBI came to this Bank and said that ten
new 3-C notes [$100 bills] numbered in sequence were
among those found. This Bank informed the FBI that they
were part of a shipment sent to the Girard Bank on April
3. Mr. [X] also said that the Washington Post had called
to verify a rumor that these bills were stolen from this
Bank. The Post was informed of the CV&D thefts but told
they involved old bills that were ready for destruction.
Mr. [X] said that Chairman Burns doesn’t want the
System to get involved and issued a directive to all Reserve
banks on June 21, which said, in effect, that the System
was cooperating with law enforcement agencies but should
not disclose any information to others."
Three days earlier, Chairman Burns had written the following to the Joint
Economic Committee about rumors regarding the sources of funds used to finance
the Watergate burglars:
"We at the Board have no knowledge of the Federal
Reserve bank which issued those particular notes or of the
commercial bank to which they were transferred. Without
this information, there is nothing that we can do to
comply with your request."
The apparent lie to The Washington Post reporter, as a result of the directive
issued by the Chairman of the Federal Reserve, may have been part of a cover-up
of important information by the Federal Reserve. Did the Federal Reserve ever
inform the U.S. Congress about these bills it had traced that were found on the
Watergate burglars? If the answer is "No" it appears that the Federal Reserve
blocked the public and the Congress from a significant part of the investigation of
the financing of the Watergate burglars. The acting director of the FBI, who may
have been given the information, testified that he burned some Watergate files. The
Nixon administration asked him to limit the FBI’s investigation of the burglars’
financing on the grounds that further inquiry would "uncover CIA assets and
sources." That sounds familiar. What was the Federal Reserve’s role in this coverup? Did the Federal Reserve deliberately obstruct the Congress and the public?




2

66

If we only had a formal directive giving the extremely truncated version of
these meetings, as the FOMC publishes today, there would not be a historical
record of these events. The American public and the Congress are not the
barbarians at your gates. These are the people whom you must serve.
Our expert witnesses testifying today will tell you that, contrary to what
Chairman Greenspan testified about at our last hearing, accurate information does
not undermine markets. Partial information and leaked information undermines
market efficiency. I want to highlight the astounding claim in Dr. Anna Schwartz’ s
testimony: "The Wall Street Journal has reported the contents of the directive
within a week of each of 11 out of 34 FOMC meetings that were held between
March 1989 and May 1993." Since substantial information is already coming out
in leaked form, why should we pretend that it a closely guarded secret? We need
a straight-forward record with complete and accurate information.
Some claim we have all the information necessary in the formal directive that
is issued five or six weeks after each FOMC meeting. That directive is sometimes
called "minutes." However, the FOMC directive is far from a complete record and
it is equivalent to the kind of information we would get if the Supreme Court only
announced its decisions and not its opinions. Although the directive does contain
the FOMC vote, those who understand the Federal Reserve know the objective in
any FOMC meeting is to get a unanimous final vote regardless of any underlying
disagreement.
Publishing only the final vote at FOMC meetings is little more information
than could be obtained from the Congress if we issued only the vote on
adjournment and none of the discussion. In order to obtain a record that establishes
individual accountability, there must be a more detailed record. Most of the socalled "minutes" the Federal Reserve now issues are boiler-plate reports on the
economy that anyone could copy out of government and newspaper reports.
In 1976, the FOMC members arbitrarily announced that they had stopped
taking minutes of their meetings. In response to his inquiries, Congressman Steve
Neal investigated and reported that among the 55 individuals who opposed the
FOMC’s decision to stop taking minutes were four former Federal Reserve
Governors and two former presidents of Federal Reserve Banks. One of the
strongest letters was from Jerry L. Jordan, formerly an official at the Federal
Reserve Bank of St. Louis and here today as president of the Federal Reserve Bank
of Cleveland. His letter of October 21, 1976 said:
"As an economist in the Federal Reserve for over eight years, I
found the "memoranda of discussion" [the name for the minutes] to be
extremely useful. Even when I attended the FOMC meetings I always
reviewed the memoranda of previous meetings as part of the
preparation for the next meeting.




3

67

The President of the St. Louis Federal Reserve Bank was
definitely influenced in a very positive way by the existence of a
permanent record that would eventually be made public. It helped
him and his staff to maintain intellectual honesty, sometimes in the face
of great pressure to bend. He knew that even when his views fell on
deaf ears in a meeting, consistent analysis of the problem and the
recommendation of solutions would be in the record to be viewed with
historical perspective."
I want to know why minutes which were clearly helpful up until 1976,
suddenly became harmful after 1976.
I understand the peculiar position of the distinguished presidents of the
Federal Reserve Banks who are testifying today. I had thought that last week
Chairman Greenspan would have emphasized that you serve as independent
coequals on the FOMC. However, he contends that the "ultimate defense against
a bank president ... is the power [by the Board of Governors] to remove that
person from office." I think this says a great deal about your independence.
Nevertheless, I hope that our distinguished witnesses will give their honest views
today and that they will be perfectly frank while their comments are being
recorded. I look forward to your testimony.




4

68

STATEMENT BY
REPRESENTATIVE JAMES A. LEACH
Before the Committee on Banking, Finance and Urban Affairs
Hearing on Reforming the Federal Reserve System
October 19, 1993
Today we hear from ten presidents o f the Federal Reserve District Banks
and six Governors o f the Federal Reserve Board. Given that these individuals
influence the allocation and expansion o f credit, not only through their member­
ship on the Federal Open Market Committee (F O M C ) but through their regula­
tion o f the banking industry, it is important to note in the context o f a hearing on
reform ing the Federal Reserve System that the American public is served by
individuals represented here o f distinctive quality and integrity. We w elcom e
them in a spirit o f appreciation and trust.
Here, I appreciate the sense o f history the Chairman brought in his opening
comm ents, but it should be noted that no member o f this panel has in any sense
been tarred by Watergate. All have agreed to appear voluntarily with no implica­
tion o f wrongdoing. Given the braintrust assembled, I am only sorry the subject
matter isn't the state o f the econom y and at the risk o f presumption, I might sug­
gest the panel — or a representative grouping — be invited back, perhaps in a
Humphrey-Hawkins context to discuss the economy.
At the first two hearings, this Committee gave deserved attention to the
political science predicament o f Reserve Bank presidents, who are assigned a
particular public responsibility but are selected by boards comprised in the m ajor­
ity by individuals not only from the private sector but one element o f it. In de­
fense o f this selection m ethodology the Federal Reserve System can properly
point to a tradition o f independence, quality, and political insulation. Neverthe­
less, there is an element o f unseemliness inherent in a system in which sectors o f
the public may view their interest as distinct from that o f the banking sector, in
particular when individuals are asked to regulate an industry while being ac­
countable to boards o f directors controlled by members o f that industry.
While I have a high regard for current leadership o f the Fed and the direc­
tion it is currently m oving on the regulatory front, it may be useful to point out
three areas where the Federal Reserve System in the past has instituted discrimi­
natory regulatory policies. First, in the late seventies and early eighties, the Fed
went along with the large money center banks in believing that sovereign guaran­
tees were ironclad because governments never go broke and, accordingly, im­
posed lesser regulation on LDC debt. Second, the Fed has continued to assume
that large banks, because o f their large deposit and lending bases, need less capi­
tal than smaller banks. And, third, it has not required bad loans at large banks to
be written o f f as rapidly as regulators require comparably bad loans at smaller
banks.
M y view is that discriminatory regulation skews the financial landscape
and amounts to credit allocation. The irony in regulation being too accom m odat­
ing, i f not cozy, with individual banks is that management becom es misserved.
For instance, N ew York money center banks for decades have been on the cutting
edge o f wanting to see liberalization o f the Douglas Amendment and McFadden
Act so that they could branch interstate. When interstate barriers started to fall,




69
w ithout C ongressional m odification o f these law s, many o f the m oney center
banks w ere in no position to take advantage o f the liberalization because their
capital had been so dram atically depleted. T his w as due, in part, to lending m is­
takes w hich w ere in effect sanctioned by regulators. If regulators on a tim ely basis
had insisted on stronger capital ratios for international lending or m oved promptly
to force recapitalization w hen problem loans, dom estic as w ell as foreign, d ev el­
oped, these institutions w ould be larger and stronger today.
It is instructive to note that federal regulators, albeit a little late, forced
B ank o f A m erica to restructure and recapitalize approxim ately five years before
they served com parable notice on the Hast coast. Bank o f A m erica later credited
regulator sternness w ith its turnaround and w ith its ability by the end o f the decade
o f the 1980's to launch an expansionary drive.
O ne o f the lesso n s o f the S&L debacle is that capital m oves toward institu­
tion s or industries w hich have the w eakest regulation.
The problem o f regulator driven deposit skew ing w as m ost evident in the
1980's in the thrift industry w hen institutions w ere allow ed to leverage minimal
and in som e ca ses non -existen t capital bases. It is, how ever, a not inconsequential
problem today w ithin the banking industry. For exam ple, one ram ification o f over­
reliance on the B a sle A ccord standards is that the more attention given to risk
w eigh tin g assets, the less reliance national bank regulators are putting on the lever­
age ratio. O ver-reliance on risk-based capital standards w ithout use o f an adequate
leverage ratio leads to com petitive inequities in deposit seek in g and de facto credit
allocation o f those deposits. The fact that state bank regulators rely more on lever­
age ratios than federal regulators m eans that deposits w ill flow to national banks
rather than state banks, to m oney center institutions rather than com m unity banks,
to bond buying instead o f entrepreneurial lending.
Here, the anom aly exits as in virtually all regulated circum stances that regu­
latory agencies have a vested interest in the com petitive vitality o f the institutions
they regulate. H ence, i f the Fed w ants to keep, w hich I support, a major regulatory
function, it m ust be careful to insure that con flicts, perceived or otherw ise, do not
ex ist, that regional inequities are not allow ed to develop, and that advantages are
not provided one kind o f institution over another.
A s m entioned earlier, one o f the lesso n s o f the S&L crisis w as that disparity
in regulation sk ew s capital flow s. A nother w as the conclusion by C ongress that it
had been a mistake to allo w the 12 district banks o f the Federal H om e Loan Bank
System w ith boards com prised in the majority o f representatives from member
institutions a principal role in the regulatory process. A ccordingly, as part o f the
S& L cleanup in FIR R EA , C ongress abolished the regulatory functions o f the
FH LB system and transferred them to an o ffice w hich has its director publicly
appointed.
A s w e consider regulatory consolidation, there is a case for and against
providing continuation o f regulatory responsibility for the Federal R eserve System,
B ut if it is to be preserved, an institutional arrangement must be established w hich
g iv e s no hint o f s e lf -regulation, o f the fo x guarding the foxes. In a country in
w h ich process is our m ost important product it sim ply is unacceptable for regula­
tors, in any sen se, to be accountable to boards w hich in tum are controlled by the
regulated.
I look forward to the testim on y o f today’s w itn esses.




-

30

-

70
OPENING STATEMENT OF THE HONORABLE ERIC D .

FINGERHUT

b e f o r e the
COMMITTEE ON BANKING,

FINANCE AND URBAN AFFAIRS

o f the
U .S HOUSE OF REPRESENTATIVES

on
OCTOBER 1 9 ,

Thank you Mr. Chairman.

1993

Throughout my career,

I have been a

strong and outspoken advocate of government reform.

A regular,

in-depth examinationn of the operations of all branches of
government,

including this institution,

of representative democracy.

is in the best traditions

For example,

I believe instituting

congressional reform will restore our credibility with the public
and enable us to address the serious problems facing our country.
Until the country believes in the process once again,

our

attempts to make difficult decisions will continue to be stalled
by a wall of public cynicism.

However,

a re-examination of all

levels of government does not mean we always need to take action.
I do not believe in reform for reform's sake.
It is from this perspective that I have approached these
hearings.

After listening to the witnesses and studying the

testimony, particularly that of Chairman Greenspan,
reached some conclusions.

I have

While there is always room for

improvement in the procedures of the Federal Reserve,
of one thing:

the Federal Reserve is working.

I am sure

During the last

12 years, while the executive and legislative branches quadrupled
our national debt,
interest rates.

the Fed whipped inflation and brought down

In fact,

the Fed has done their job so well,

that

when inflation crept over just 4% earlier this year, most of us




71

were startled.
I am also convinced that this outcome is a result of the
independent status of the Fed.

The ability to focus on long­

term stability is compromised when political pressures interfere.
The short-term economic benefits of decisions based on political
expediency are far outweighed by the inflationary costs which
inevitably occur after a lag. International comparisons confirm
this relationship between Central Bank independence and low
inflation rates.
Fed,

Before we change the decision process of the

I want to be sure we are not risking the soundness of our

monetary policy.
This should not be interpreted as a blanket approval of all
of the Fed's actions.

It is not.

Most of the reforms Chairman

Gonzalez has proposed are modest and would not do irreparable
harm to our monetary policy.

For example,

I believe publishing

the minutes of the FOMC's meetings on a more timely basis would
reduce information uncertainty and increase market efficiency.
However,

I am concerned that Congress has once again taken

up a more glamorous and high profile issue at the expense of
others which are more mundane, but more substantial.
easing the credit crunch,

instituting community banking,
for business,

I believe

reducing burdensome bank regulations,
and creating a secondary market

commercial and community development loans would go

a long way to stimulating our economy and building a base for
long and sustainable growth.

Reforming the Federal Reserve

processes adds nothing to that fundamental responsibility of
government and may indeed detract from it.




72

I thank Chairman Gonzalez for raising these issues.
this issue is very important to the Chairman.

I know

I would only urge

this Committee not to get sidetracked when the American economy
deserves our full attention.




73
OPENING REMARKS FOR REP. SAM JOHNSON
BANKING COMMITTEE HEARING ON
FEDERAL RESERVE OVERSIGHT - OCTOBER 19, 1993

THANK YOU MR. CHAIRMAN:

I LOOK FORWARD TO THIS HEARING TODAY TO
HOPEFULLY GET A NEW PERSPECTIVE ON POSSIBLE
CHANGES TO THE FEDERAL RESERVE SYSTEM. I
WOULD LIKE TO THANK ALL OF THE WITNESSES
FOR BEING HERE TODAY AND ESPECIALLY
RECOGNIZE MR. BOB MCTEER, THE PRESIDENT OF
THE DALLAS FEDERAL RESERVE BANK.

AS WE CONSIDER LEGISLATION TO OPEN THIS
SYSTEM , I FEEL THAT IT IS ESSENTIAL TO HAVE
INPUT FROM ALL THOSE EFFECTED.
FURTHERMORE, I FEEL THAT WE SHOULD NOT
CHANGE THIS SYSTEM UNLESS IT IS ABSOLUTELY
NECESSARY.




74

HOWEVER, I DO HAVE SOME CONCERNS WITH
REGARD TO THE REGIONAL RESERVE BANKS. I AM
CONCERNED THAT SOME BANKS, SPECIFICALLY
NEW YORK, HAVE MORE SAY IN DOMESTIC
MONETARY POLICY AND INTERNATIONAL
CURRENCY POLICY THAN OTHER FED. BANKS.

I AM ALSO CONCERNED THAT THE CURRENT GAO
AUDITS ARE NOT REVEALING TO THE TAXPA YERS
REAL AND UNNECESSARY SPENDING BY THE
REGIONAL BANKS. FOR EXAMPLE, IS ANY GAO
AUDIT GOING TO REVEAL THE $200,000 THE
DALLAS FEDERAL RESERVE IS SPENDING TO
RENOVATE THEIR GUN RANGE IN THE BASEMENT?
I HOPE THE REGIONAL PRESIDENTS CAN GIVE ME
SOME INSIGHT ON THESE CONCERNS. THANK YOU
MR. CHAIRMAN.




75
Opening statement of
Congresswoman Lucille R oybal-Allard
Banking Com m ittee Hearing on the Federal Reserve, # 3
O ctober 19, 1993
Mr. Chairman, I want to com m end you for holding these hearings on H.R. 28, legislation
which w ould establish accountability on behalf o f the Federal Reserve. This is a bill which
merits serious attention and I look forward to hearing our expert testimony. Specifically,
I am anxious to hear how the Federal Reserve intends to im prove its record o f minority and
wom en hiring.
Last week, Chairman Greenspan highlighted the sluggish pace at which wom en and
minorities have m oved into the top echelons o f the federal reserve.
I concur with the
Chairman that this problem , which exists throughout our society, is very damaging. In order
to rectify pervasive discrimination, we must make the necessary changes now-- and wherever
possible, change must be applied equally to all areas o f the federal government, including
the Federal Reserve.
Mr. Chairman, for twenty-nine years the Federal Reserve has been exempted from
com pliance o f Title VII o f the Civil Rights Act o f 1964. This exemption has effectively
allowed the Fed to view the matter o f minority and wom en hiring as merely a goal, not a
directive. T here is no good reason for this exemption to remain-- it must be repealed and
the time for change is now.
Mr. Chairman, I look forward to working with the com m ittee as we consider H .R. 28 and
as we examine the Federal R eserve’s dismal perform ance with regard to the hiring and
prom oting o f w om en and minorities.




76
For R e l e a s e on D e l i v e r y
10:00 A.M. EDT
Octob er 19, 1993

T e s t i m o n y by

Alan Greenspan

Chai rman

B o ard

of G o v e r n o r s

of the F e d er al R e s e r v e

System

b ef ore the

Committee




on Banking,

U.S.

H o use

Finance

and U r b a n A f f a i r s

of R e p r e s e n t a t i v e s

Oct o b e r

19,

1993

77
I ap p reciate t h is
on t h e a p p r o p r i a t e
Market Committee

of fu lle r

and d e c i s i o n s

has b een a c o n t r o v e r s i a l

In C o n g r e s s ,

academia,

t o p i c has been d e b a t e d

th is

The FOMC i t s e l f

procedures in

th is

the f i n a n c i a l m arkets,

has r e v ie w e d

area f r e q u e n t l y

p ractices

several

balance:

The a p p r o p r i a t e d e g r e e

strik in g

th e

p r o v i d e my v ie w s

by t h e F e d e r a l Open

or more i m m e d ia te d i s c l o s u r e

h isto ric a lly .

years.

to

(FOMC).

The i s s u e
FOMC d i s c u s s i o n s

opportunity

d e gr ee o f d i s c l o s u r e

tim e s.

p o lic ie s

and has

At t h e h e a r t

effectiv e

one

and

r e p e a t e d ly over the
its

and

r ev ise d

of th is

o f openness

r i g h t b a l a n c e bet ween t h e

know and th e need f o r

of

issu e

is

comes from

p u b lic 's

po licym a kin g

its

rig h t

to

and

im p le m e n ta tion .
In a d e m o c r a t i c
s h o u l d be i n t h e

open,

so ciety ,

p u b lic ‘ p o licy

e x c e p t where e x p o s u r e

prim ary f u n c t i o n a s s i g n e d

to

an i n s t i t u t i o n

A ccord in gly,

th e F e d e r a l R e s e r v e makes i t s

im m ediately,

e x c e p t when d o i n g so

effica cy

of p o licy

process.

requ irem en ts,
we e s t a b l i s h

those

discount

d ecisio n s

fo rth

we p u b l i s h

a o n e -d a y l a g ,
c on sid e rab le

are

pro m p tly

in

our b a l a n c e

enablin g a n a ly s ts

i m p le m e n tin g d e c i s i o n s w i t h
operation s.

rate

our

reports

sheet
to

p o licy

However,

once.

When

g ro w th ,

those

to

Congress.

e v e r y week w i t h j u s t

r e v i e w our o p e r a t i o n s

im m ediately are th e

respect

any c h an g es

operation s.

d e lib eration s
a fter




o f the p o li c y

or r e s e r v e

announced a t

to

our

sig n a lle d

And we p u b l i s h m i n u t e s

and d e c i s i o n s

the next

open market

in our o b j e c t i v e s

r e s e r v e m arkets a r e q u i c k l y and p u b l i c l y

s h ortly

pu b lic

d e ta il.

What we do n o t d i s c l o s e

open market

d e c isio n s

could undercut the

new r an g es f o r money and c r e d i t

ranges are s e t
Moreover,

im pedes t h e
by la w.

or compromise t h e i n t e g r i t y

When we change t h e

d e cisio n s

in
by our

o f the

fr om ea c h FOMC m e e t i n g

r e g u l a r m e e t i n g has

ta k e n p l a c e .

in

78

-

T h e se m i n u t e s ,
1993,

a copy o f which f o r

I h av e a t t a c h e d

more th an 30 p a g e s ,
e con om ic f a c t o r s
approaches

to

in

d irect

The o p e r a t i o n s

these

p o s i t i o n where
in h ib it

c o m p le t e

I

o f c e n t r a l banks have a

o ften

openness

or ev en t h w a r t t h e

oth er

o f the nature o f a c e n t r a l

and f o r e i g n

in stitu tio n s

lik e

o f being s e c r e t i v e .

a resu lt

i m p a ct on f i n a n c i a l

th erefo re,

o f the

p o licy

r e a c h i n g our d e c i s i o n s .

the Federal Reserve,

la rg e ly

bank’ s m issio n .

can run fr om 15 t o

and a l t e r n a t i v e

h as a r e p u t a t i o n

is

th e m e e tin g o f F e b r u a r y ,

statem ent,

and a n a l y s i s

N ev erth eless,

th is

th is

p r e s e n t i n g a com prehensi ve r e c o r d

considered

c e n t r a l banks,
suspect

2-

exchange m a r k e t s ;

fin d

them selves

and d i s c l o s u r e

im p le m e n t a t io n

in the

could

of th eir

p u b lic

purpose.
Suppose,
by t a r g e t i n g

the

be a p p r o p r i a t e
the

fu tu re.

that

the

rate

bank p h r a se d i t s

p la n s--th a t

the

is,

if

certain

a p a rticu la r

changes

e ffe c tiv e ly

More b r o a d l y ,

bank t h a t

operated
it

m ig h t

a given p o in t

clo ser

t o home,

i n ter m s

economic

in
sa y

of

or f i n a n c i a l

a c t i o n would be t a k e n .

im m ediately,
carried

at

p o lic ie s

t h o s e d e c i s i o n s were made p u b l i c ,

fr o m b e i n g

m arkets would ten d t o
preven tin g the p o l i c i e s

out as pla n n e d .

im mediate d i s c l o s u r e

of these

types

c o n t i n g e n c i e s would t en d t o pro duce i n c r e a s e d v o l a t i l i t y

in f i n a n c i a l
only to

m arkets,

actual

as market p a r t i c i p a n t s

action s.

expresses

a p re d isp o sitio n

d irective

to

exam ple tow ard e a s i n g ,

rather

It

is

o ft e n the

toward a p o l i c y

t h e Open Market D esk.

concerned about
p o lic y

r e a c t e d n ot

Fed eral Reserve a c t io n s but a ls o

F ed eral Reserve

fo r

a central

exchange r a t e d e c id e d t h a t

change t h e t a r g e t

prev ailed ,

in corporate

of

ex am p le,

to b r in g the d is c u s s io n

cen tral

con d ition s
If

to

O r,

con tin gency

fo r

fo reig n

im p lies




p o ssible
t h e FOMC

change i n i t s

Such a p r e d i s p o s i t i o n ,
t h a t t h e FOMC i s more

d e v e lo p m e n t s t h a t would d i c t a t e

than a t i g h t e n i n g ,

to

c a se t h a t

an e a s i n g

and t h e r e f o r e wants t o

of

79
-3respo n d

rela tiv ely

p r o m p tly t o

need f o r such a c t i o n .
w ithout

in fo rm a tio n

We o f t e n

any change i n

express

instrum ent

In such c i r c u m s t a n c e s ,

the

settin g s

re le a se

s u g g e s tin g the

th is

p r e d isp o sitio n

in

o f those

fa ct

resu ltin g .

directives

d u r i n g t h e p e r i o d t h e y a r e i n f o r c e would o n l y add t o
flu ctu a tio n s
immediate

in f i n a n c i a l m ark e ts,

As a c o n s e q u e n c e ,
i m p a ir t h e u s e f u l n e s s
members,

a d isc lo su re

r e q u ir e m e n t would

o f the d i r e c t i v e s ,

a s Committee

c on c e rn e d about t h e announcement e f f e c t

d irective
tend to

moving r a t e s when no

change was i n t e n d e d .

b iased

eith er

toward e a s e

shy away from a n y t h i n g b u t a v o t e

change or o f no change a t t h e m e e t i n g .
of fle x ib ilit y

of

would

im mediate

An i m p o r t a n t e l e m e n t

i n t h e c u r r e n t p r o c e d u r e s would be l o s t ,

which can s c a r c e l y
d isclo su re

of a

or t i g h t e n i n g ,

serve the p u b lic

o f t h e d i r e c t i v e would

mon eta ry p o l i c y m a k i n g ,

and i t

in te re st.

Immediate

change t h e n a t u r e

of

would n ot be a change f o r

the

b etter.
To r e p e a t ,
p u b lic

in stitu tio n s

as a g e n e r a l m a t t e r ,
to

con d u ct t h e i r

The F e d e r a l R e s e r v e e n d o r s e s
it,

th is

it

is

b u sin e ss

p rin c ip le

d esira ble

for

i n t h e open .

and a d h e r e s

to

e x c e p t when do in g so would p r e v e n t us fr o m f u l f i l l i n g

our fu n d am en tal m i s s i o n

o f p r o d u c i n g sound p u b l i c

H o l d i n g open m e e t i n g s
v id e o ta p e ,

a ud io t a p e ,

seriou sly

con strain

a irin g

o f v iew s,

te n tativ e

o f th e FOMC or r e l e a s i n g

or t r a n s c r i p t

the pro cess

render th ose m eetings

the f o r t h r i g h t

M on etary p o l i c y would s u f f e r ,

o f form ulating

sim ply

g i v e and t a k e ,




as t o

and t h e

and t h e economy w i t h
c u rren tly

c o u ld n o t be m en tio n ed i n

We would no l o n g e r have th e b e n e f i t
fr om f o r e i g n

p o licy

The c a n d id

l i k e l y wo uld d i s a p p e a r .

A number o f i m p o r t a n t i t e m s
FOMC m e e t i n g s

a

o f them would so

n early unprod uctive.

p o s i n g o f new i d e a s

p o licy .

c e n t r a l banks and o t h e r

at

open forum .

of sen sitive
o fficia l

it.

discussed

in form ation

in stitu tio n s

80

- k -

or o f

p ro p rie ta ry

as we c o u l d n o t
in

fin a n cia l

risk

from p r i v a t e - s e c t o r

the p u b lic a t io n

sources,

o f in form ation

g i v e n us

con fiden ce.

in

in form ation

Moreover,

have t o

fo rgo

o p tio n s.

prevent

verbatim

record

problem ,

but

o f th e f u l l
w o u ld ,

the v o i c i n g

econom ic

in

t h e FOMC m igh t

range o f p o l i c y

effe ct,

become s e l f ­

o f any v ie w s t h a t m igh t

the m arkets.

Even a l a g i n

releasin g

a

o f t h e m e e t i n g s would n o t e l i m i n a t e t h i s

only a tte n u a te

p rescrip tion s

su rfaced

to

c r e a t in g unnecessary v o l a t i l i t y

exchange m a r k e ts ,

Our d i s c u s s i o n s

censored to

be

avoid

exploration s

p ro ve u n s e t t l i n g

fo r

to

and f o r e i g n

it.

and r u m i n a t i o n s

U n c o n v e n ti o n a l p o l i c y

about t h e l o n g e r - t e r m

outlook

and f i n a n c i a l market develo p m en ts m ight n e v e r
at m eetin gs,

fo r

fear

of ig n itin g

a sp ecu lative

r e a c t i o n when t h e d i s c u s s i o n was d i s c l o s e d .
L e t me t a k e a moment t o
process

fo llo w ed

at

m on e ta ry p o l i c y .
d e v e lo p m e n t s
d iscu ssion

tio n a l

mon eta ry p o l i c y

evalu ate

we t h e n

the

in ,

c on sid e ratio n s.

The R e s e r v e

new i d e a s

either

amount o f f r e e

are o ft e n
in itiated




t h e U. S .
in tern a ­
In l i g h t

c o n s i d e r whether th e s t a n c e

t h e f u t u r e unde r p a r t i c u l a r

Ideas

a roundtable

begin s.

outlook fo r

q u e s t i o n i n g by t h e p a r t i c i p a n t s

r e je c te d .

on

of recent

where r e l e v a n t ,

key FOMC s t a f f members t a k e s p l a c e .
debate,

the

and deve lo p m en ts w i t h i n

n eeds t o be a d j u s t e d ,

A con sid e rab le
probing

trends,

participants

and f i n a n c i a l

d iscu ssion ,

in

presen tatio n s

con d ition s

members b r i n g

econom ic

reach d e c i s i o n s

and b o t h t h e y and th e members o f t h e Board

go on t o

A ll

p ossibly

nineteen

describe

d istricts,

economy.

staff

to

and em erg ing economic

o f Governors

th is

A fter

of a ll

Bank p r e s i d e n t s
th eir

d e s c r i b e more f u l l y

FOMC m e e t i n g s

tested,

of

of

im m ediately,

or

circum stances.
discu ssion

and

o f each o t h e r and o f

In t h e w i d e - r a n g i n g
many o f which a re

by one p a r t i c i p a n t a r e f r e q u e n t l y

81

b u ilt

upon by o t h e r s .

in valu ab le

in gred ie n t

This typ e

As I i n d i c a t e d b e f o r e
p r e v a i l i n g v ie w s
in sig h ts

of discourse

th is

an

Committee l a s t

o f many p a r t i c i p a n t s

emerge.

is

o f our p o l i c y m a k i n g p r o c e s s .
th e

evidence

change as

week,

and

T h i s p r o c e s s has proven t o be a v e r y

effectiv e

procedure f o r

d irective

to t h e Open Market Desk can be c r a f t e d .

n ot f u n c t i o n
that

e ffe c tiv e ly

g a i n i n g a c o n s e n s u s around which a

if

p articip an ts

t h e i r h a l f - t h o u g h t -t h r o u g h , but n o n e th e le s s

v a lu a b le,

be a s t e r i l e

in

set

such a s i t u a t i o n

po licym a kin g.

the p u b lic

requ ired

A te n d e n c y would a r i s e

m eeting d i s c u s s i o n s ,

with p u b lic

or f o r

th e m e e ti n g w i t h a f i n a l

p o sition

v ie w s

of oth ers.

It

because

action s.

t h a t v o te are a l s o

This i s

recorded,
recorded.

the

t h e i r v ie w s and t h e r e a s o n s

In t h e

fo r

In b o t h t h e Freedom o f

m eetings

that




t h e m i n u t e s we
v o i c e d which v ie w s
escape

contrary
by name,

to f a c t .
and th e

In t h e c a s e

case

record w i l l

of a

o f a vote

is

cast

o f t h e m in u t e s

accu rately

r eflec t

v o t in g as th ey d i d .
Inform atio n Act

t h e Government i n t h e S u n s h in e A c t ,
recognized th at

the

le ss

p u b lish .

t h e members r e v i e w d r a f t s

a ssu r e th em selves t h a t the

to

to

r e a s o n i n g b e h in d t h e v o t e

explained s e p a r a t e l y .

w ith the m a jo r i t y ,
to

th eir

from t h e m a j o r i t y ,

g en erally

su b ject

t h e FOMC members t h e m s e l v e s

fo r

o f each FOMC member i s

reasons fo r

not

i n d i c a t e which i n d i v i d u a l s

the m e e tin g s,

dissent

each p a r t i c i p a n t

than t h e m in u t e s we c u r r e n t l y

a c c o u n ta b ility

o n e -o n -o n e p r e ­

Such a r e c o r d would be f a r

has been a v e r r e d t h a t ,

do not

cap tu ring

o f m on eta ry

fo r

enter

in form ative

r e c o r d would

m e e t i n g s m e r e l y ann ou n cin g

a l r e a d y a g r e e d -u p o n p o s i t i o n s ,

The v o t e

p o ten tia lly

o f b la n d pronouncem en ts s c a r c e l y

th e n e c e s s a r y d e b a t e s which a r e

at

could

n o t i o n s would soon be made p u b l i c .
I fear

rele a se

It

had t o be con ce rn e d

t h e r e were t y p e s

s h o u l d be p r o t e c t e d

Congress

(FOIA)

and

e x p lic itly

o f in fo rm a tio n

and k i n d s

from d i s s e m i n a t i o n

to

of

th e

82

p u b lic .

Certain

in form ation
fin a n cia l
wo uld

e x e m p t i o n s have been p r o v id e d

that,

fo r

ex am p le ,

n a t u r e and i n

In th e

i t was de te rm in ed t h a t

exem pted a r e a s ,

reasons,

rele a se

re q u irin g

the

I b elie v e

in terest.

of

For

t h a t th e c on se q u e n ce s o f

prompt r e l e a s e

m e e t i n g s would most

that

i n f i n a n c i a l m a r k e ts .

i n f o r m a t i o n would n o t be i n t h e p u b l i c
sim ila r

i n FOIA f o r

of a con fid en tial

t h e Sunsh ine A c t f o r m e e t i n g s

prompt s p e c u l a t i o n

variou s

is

o f a verbatim record

certa in ly

o f FOMC

n o t be i n th e n a t i o n ' s

best

in te re st.
Mr.
h earin g,

Chairman,

you a l s o

i n your l e t t e r

posed s e v e r a l

to

t h e m a in t e n a n c e

to

the

to

t u r n now t o

o f notes

prem a tu re r e l e a s e

or r e c o r d s

in k eep in g

track

and t h u s

reached w ith
the n o te s

respect

are kept

in

th is

and

I would l i k e

q u estio n s.

I take very b r i e f ,

rough n o t e s

These n o t e s a s s i s t

o f Committee se n t i m e n t
in

to

rela te d

o f FOMC m e e t i n g s

those three

e x p r e s s e d by p a r t i c i p a n t s .

progresses

q u estion s

o f FOMC i n f o r m a t i o n .

t h e a nsw ers t o

A t FOMC m e e t i n g s ,
the view s

of in vitation

sp e cific

on
me

as th e m e e t i n g

j u d g i n g where a con se n su s may be

t o m on etary p o l i c y .
a locked f i l e

A fter

cabinet

th e m e e t i n g ,

a lo n g w i t h o t h e r

FOMC m a t e r i a l s .
O thers
tak in g n o te s,
th eir

own r e s p o n s e s .

presid en ts
whatever
cover

a t t e n d i n g t h e FOMC m e e ti n g s may a l s o

and I am s u r e t h e y w i l l

that

they

te ll

I have s u g g e s t e d

be

you a bout them i n

t o th e R e s e r v e Bank

respon d t o you r q u e s t i o n s r e g a r d i n g

r e c o r d s may be k e p t a t t h e i r

own Banks;

r e c o r d s made by t h e Board s t a f f ,

and.

I w ill

in p a r t i c u l a r ,

by t h e FOMC s e c r e t a r i a t .
Some i n d i v i d u a l members o f t h e Board s t a f f
h an dw ritten n otes

and r e t a i n

d isch arg in g t h e ir

resp o n sib ilitie s.

recorded
audio

ele c tro n ic a lly

tapes

a r e u s ed t o




take

them t o h e l p them i n
The m e e t i n g s a r e

by th e FOMC s e c r e t a r i a t .

These

a ssist

o f th e

in the p rep ara tion

83
-7m inutes th a t

a re r e l e a s e d

subsequent m eeting;
In t h e

process

tra n scrip t

is

on s e l e c t e d

the p u b lic

discussed

are

over.

an u n e d i t e d

as a r e d e t a i l e d

in the course

notes

o f the m eeting.

g e n e r a l l y a r e s e e n o n l y by t h e

in p r e p a r i n g t h e m i n u t e s ,

the

recorded

the m in u tes,

pr ep ar ed from t h e t a p e s ,

top ics

fo llo w in g

the tapes

of p u ttin g to g eth er

T h ese m a t e r i a l s
in volved

to

thereafter,

staff

and t h e do cuments

a re

k e p t un der l o c k and ke y by t h e FOMC s e c r e t a r i a t .
With r e g a r d t o your f i n a l
in form ation

about FOMC m e e t i n g s ,

s t r o n g v ie w t h a t any u n a u t h o r i z e d
is

a very seriou s m atter.

c le a rly

u n fair

to

Lea ks

th e p u b l i c ,

policym aking p r o c e s s ,

query,

on t h e

I would a g a i n
rele ase

rele ase

state

of

my

o f FOMC d e c i s i o n s

o f FOMC p r o c e e d i n g s

p o ten tia lly

d isru p tive

and u n d o u b t e d ly d e s t r u c t i v e

are
o f the

o f pu blic

c o n f i d e n c e i n th e F e d e r a l R e s e r v e .
Any l e a k s

t h a t may have o c c u r r e d were most

a s s u r e d l y not o r c h e s t r a t e d
d elib erate

current p o lic ie s
in form ation

that

call

fo r

a re i n p l a c e f o r

p rev iou sly .

by t h e FOMC.

d elayed

to

d iffe re n t.

In some c a s e s .

t h e p r e s s may b e l i e v e
r e c e n t monetary p o l i c y

c o n sid e ra tio n s to
experienced

c on fid en tial

s o m e th i n g q u i t e

FOMC p a r t i c i p a n t s who s p e a k t o

d e cisio n s,

b u t t h e y may i n

a llo w c o n c lu s io n s

several

it

is

esp ecia lly

sources.

We s h o u l d n o t

we cannot and sh o u ld n o t w a l l
our o b l i g a t i o n

o urselves
to

f a c t have

p o licy

t o be drawn,

sp e ak in g to

situ a tio n .

o f the

i n f o r m a t i o n a b o u t our d e c i s i o n s .

fr om t h e m edia ;

of

t h e y have r e v e a l e d n o t h i n g a b o u t

reporters

p u t s us i n a d i f f i c u l t




of
I in d icated

what a ppear t o be

represent

i n a d v e r t e n t l y p r o v i d e d enough o f a s e n s e

tim e,

as

Our

p o lic ie s.

an e x t e n t ,

l e a k s may i n s t e a d

A

repugnant.

release

good r e a s o n s ,

l e a k s undermine t h e s e

I suspect t h a t,

fo r

is

They a r e grounded on an a s s u m p t i o n

c o n fid e n tia lity ;

d e lib era te

or d i r e c t e d

prem ature l e a k o f i n f o r m a t i o n

This

reveal

A t t h e same
o ff

explain

en tire ly

t h e broad

84

-

con sid e ratio n s

t h a t m o t i v a t e monetary p o l i c y ,

c e r ta in m isim p re ssio n s.
p o ssib le,

w ithout

v io la tin g

8-

and t o

r o i l i n g m arkets,

the t r u s t

of

fu rth er

unauthorized

steps

the n e c e s s i t y

during the

periods

other tim e s .

fu tu r e

o f avoid ing

a fu ll

it

and

curb any

We have r e ­

has been made c l e a r

I perso n ally

o f FOMC i n f o r m a t i o n ,

p u b lic

caution

t h a t any

in clu d e

to

about the

can a s s u r e you t h a t

th is

in past
I have

or t o

o t h e r members

resu lts

o f an FOMC

s c h e d u le d

release.

statem ent,

howev er:

of

I would
From t im e

I have b r i e f e d members o f v a r i o u s A d m i n i s t r a t i o n s
outcom es

a ssist

o f FOMC m e e t i n g s ,

them i n

f o r w hich t h e y have
h ow ev er ,

as the

to

in clu de

p lay ed a p a r t

th e p r e s s

the fo r m a l,

one f o o t n o t e

tim e ,

I

to

that w i l l

attendees.

any i n f o r m a t i o n about t h e

m eeting p r i o r

not,

ex ten sively,

con tact w ith the p ress

in vestigation

n e v e r k n o w i n g ly r e l e a s e d

could

issu e

o f in fo rm a tio n .

sworn s t a t e m e n t s from a l l
As t o w h e th e r

to

as

or

l e a k fro m an FOMC m e e ti n g w i l l be f o l l o w e d up v e r y

g ath erin g

the

th is

s u r r o u n d i n g FOMC m e e ti n g s and o f

M oreover,

a g g re ssiv e ly --b y

le a k s

creatin g i n e q u itie s ,

t h a t we b e l i e v e w i l l

rele a se

em p ha sized

at

correct

our c o l l e a g u e s .

The FOMC h as d i s c u s s e d
we have t a k e n s e v e r a l

to

convey as much i n f o r m a t i o n

Federal

the

b ec a u s e t h a t kn owled ge

fo rm u la tio n

o f government p o l i c i e s

re sp o n sib ility .

been a r e l e v a n t

This

q u a lifica tio n

has

one over th e p a s t y e a r or s o ,

R e s e r v e h as not a l t e r e d

its

instrum ent

se ttin g s.
I tru st
wrong a b o u t t h i s ,
d e c isio n s w i l l
change
I

substance

t h e FOMC’ s p o l i c y

b elie v e

as a r e s u l t ,
that

a sh ift

it

and d e c i s i o n s

itse lf.




beh ind u s .

If

I

am
of

Should we have t o

would be u n f o r t u n a t e ,

t o prompter d i s c l o s u r e

o f our d e l i b e r a t i o n s w i l l

d iscu ssion s

is

on d e la y e d d i s c l o s u r e

have t o b e r e e v a l u a t e d .

our p o l i c y

firm ly

t h e pro blem o f l e a k s

adversely a f f e c t

fo r

o f the
our

and t h e r e f o r e monetary p o l i c y

FEDERAL RESERVE press release

For Use at 4:30 p.m.

March 26, 1993

The Federal Reserve Board and the Federal Open Market
Committee today released the attached minutes of the Committee
meeting held on February 2-3, 1993.
The minutes for each meeting of the Committee are made
available a few days after the next regularly scheduled meeting
and subsequently are published in the Federal Reserve Bulletin.
The summary description of economic and financial conditions
contained in these minutes is based solely on the information
that was available to the Committee at the time of the meeting.

Attachment




86

Min u t e s

of the Federal O p en Market Committee
M e e t i n g of February 2-3.J.993

A m e e t i n g of the Federal Open Market Committee was held in
t he offices of the Board of Governors of the Federal Reserve Syst e m in
W ash i n gton, D.C., on Tuesday. February 2. 1993, at 2:30 p.m. and was
c o n t i n u e d on Wednesday. F e bruary 3. 1993. at 9:00 a.m.
P RESENT:

Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Ms.
Mr.

Greenspan, Chairman
Corrigan, Vice Chairman
Angell
Boehne
Keehn
Ke l l e y
LaWare
L i n dsey
McTeer
Mullins
Phillips
Stern

Messrs: B r o a d d u s . Jordan. Forrestal, and Parry, A lternate
Members of the Federal Open Market Committee
Messrs. Hoenig. Melzer. and Syron,
Reserve Banks of Kansas City.
respectively

Presidents
St. Louis,

of the Federal
and Boston,

Mr. K o h n . Secretary and Economist
Mr. Bernard. Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. M a t t i n g l y f General Counsel
Mr. Patrikis.
Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. R. Davis, Lang, Lindsey. Promisel,
Rosenblum. Scheld. Siegman. Simpson,
and Slifman. Associate Economists
Mr,
Ms.
Ms.

McDonough. Manager of the System Open Market
Account
G r e e n e .^Deputy Manager for Foreign Ope r a t i o n s
Lovett.* Deputy Manager for Domestic Operations

Mr.

Ettin. Deputy Director. Division of Research and
Statistics. Board of Governors
Mr. Stockton. Associate Director, Division of R e s e a r c h and
Statistics. Board of Governors
Mr. Madigan, Assistant Director, Division of M o n e t a r y
Affairs. Board of Governors

1.
2.

A t t e n d e d W e d n e s d a y session only.
At t e n d e d T u e s d a y session only.




87
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2-

Mr. Brady,
Section Chief, Di v i s i o n of M o n e t a r y Affairs.
Board of Governors
Mr. Rosine.
Senior Economist, D i v i s i o n of R e s e a r c h and
Statisjics, Board of Governors
Mr. Wiles,
Secretary of the Board, Office of the
Secretary, Board of Governors
Mr. Winn,
Assistant to the Board, Office of Board Members.
Board of^Governors
Ms- Werneke,
Special Assistant to the Board, Office of
Board Members, Board of Governors
Mr. Siciliano,
Special Assistant to the General Counsel.
Legal Division, Board of Governors
Ms. Low, Open Market Secretariat Assistant, D i v i s i o n of
Monetary Affairs. Board of Governors
Messrs. Beebe, T. Davis. Dewald. Goodfriend, and Ms.
Tschinkel, Senior Vice Presidents, Federal R e s e r v e
Banks of San Francisco. Kansa s City. St. Louis.
Richmond, and Atlanta, respec t i v e l y
Mr. McNees, Vice President, Federal R e serve B ank of Boston
Mr. Gavin, Assistant Vice President. Federal R e s e r v e B a n k of
Cleveland
Mr. Weber, Senior R e s e a r c h Officer, Federal R e s e r v e B a n k of
M inneapolis
Ms. Meulendyke, Manager. Open Mark e t Operations, Federal
Reserve Bank of New York
The Secretary

reported that advices of the e l e c t i o n of the

R eserve Bank members and alternate members of the F e deral O p e n Market
C o m m i t t e e for the period c o m m encing January

1. 1993,

and e n d i n g

D e c e m b e r 31, 1993, had been received and that these indivi d u a l s had
executed their oaths of office.

The elected m e m b e r s and a l t e rnate

m e m b e r s were as f o l l o w s :
E. G e r a l d Corrigan, President of the Federal R e serve Ban k of N ew York,
w i t h James H. Oltman. First Vice President of the Fede r a l Reserve
B a n k of New York, as alternate;
E d w a r d G. Boehne, President of the Federal R e serve Bank of
Philadelphia, with J. Alfred Broaddus. Jr.. President of the
Federal Reserve Bank of Richmond, as alternate;
Silas Keehn. President of the Federal Reserve Ban k of Chicago, w i t h
J e r r y L. Jordan, President of the Federal R e serve B ank ofCleveland, as alternate:

3.

4.

Attended portion of m e e t i n g relating to the C o m m i t t e e ’s
discussion of the economic outlook and its l o n g e r - r u n
objectives for monetary and debt aggregates.
Attended portion of the m e e t i n g relating to the release of
FOMC information to the public.




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3

-

Robert D. McTeer, Jr.. President of the Federal Reserve B a n k of
Dallas, with Robert P. Forrestal, President of the Federal Reserve
Ban k of Atlanta, as alternate;
Gary H. Stern, P r esident of the Federal Reserve Bank of Minneapolis,
wit h Robert T. Parry, President of the Federal Reserve B a n k of San
Francisco, as alternate.
By u n animous vote,

the Committee elected the f o l l o w i n g

of f i c ers of the Federal Open Market Committee to serve until the
el e c t i o n of their successors

at the first meeting of t h e Committee

after D e c e m b e r 31.

1993.

wi t h the understanding that in the event

the d i s c o n t i n u a n c e

of their official connection with the Board of

G o v e r nors or with a Federal Reserve Bank,
o f f icial

they would cea s e to have

Chairman
Vice Chairman

D o nald L. K o h n
N o rmand R. V. Bernard
J o s e p h R. Coyne
Gary P. G i l l u m
J. V i rgil Mattingly, Jr.
E r nest T. Patrikis
M i chael J. Prell
E d w i n M. T r u m a n

Secretary and Economist
Deput y S e c r e t a r y
Assistant Secretary
Assistant Secretary
General Counsel
Deputy G e n e r a l Counsel
Economist
Economist

R i c h a r d G. Davis, Ric h a r d W. Lang,
David E. Lindsey, Larry J. Promisel,
A r t h u r J. Rolnick, H a rvey Rosenblum,
K arl A. Scheld, Charles J. Siegman,
Thomas D. Simpson, and Lawrence Slifman

By u n animous vote,

31,

of the

Assoc i a t e Economists

the Federal Reserve Bank of N e w Y ork was

se l e c t e d to execute tran s a c t i o n s
until the a d j o u rnment

for the System Open Mar k e t Acc o u n t

first meeting of the Committee after

1993.

By u n animous vote,

W i l l i a m J. McDonough,

M a r garet L. Greene,

and Joan E. Love t t were selected to serve at the pleasure of the
C o m m i t t e e in the c a p acities
A c c ount,

any

conn e c t i o n with the Federal Open Market Committee:

Alan Greenspan
E. G e rald Corrigan

December

of

Deputy Manager




of Manager of the System O p e n Market

for Foreign Operations.

System Open Market

89

-

Account,

4

-

and Deputy Manager for Domestic Operations,

Market Account respectively,

System Open

on the underst a n d i n g that their selection

was subject to their being satisfactory to the Federal Reserve B a n k of
New York.
S e c r e t a r y ’s note:
Advice subsequentl y was received
that the selections indicated above w e r e satisf a c t o r y
to the board of directors of the Federal Res e r v e Ban k
of New York.
On January 15.
authorizations,

1993, the continuing rules,

regulations,

and other instruments of the C o m m ittee listed b e low

were distributed with the advice that,
approved by the Committee,

in accord a n c e with proced u r e s

they were being called to the C o m m i t t e e ’s

atten t i o n before the February 2-3 organization m e e t i n g to give members
an o p p o rtunity to raise any questions they might h ave c o n c e r n i n g them.
M e mbers were asked to indicate if they wished to hav e any of the
instruments in question placed on the agenda for consid e r a t i o n
meeting.

No requests

at this

for substantive consider a t i o n were received.

At the meeting, the Committee voted unani m o u s l y to update the
references to the Management of the System Open M arket Account
were

contained in the following:

securities

(1) Procedur e s for a l l o c a t i o n of

in the System Open Market Account and

Security of FOMC Information.
titles,

that

(2) Prog r a m for

Apart from the i n d i cated u p d a t i n g of

all of the instruments listed b e l o w remained in effect

in

their existing forms.
1.

Procedures for allocation of securities in the System Open Market
Account.

2.

A u t h ority for the Chairman to appoint a Federal R e serve B a n k as
agent to operate the System Account in case the N e w York B a n k is
unable to function.

3.

Reso l u t i o n of FOMC to provide for the cont i n u e d operation of the
C o mmittee during an emergency; R e s o l u t i o n of FOM C a u t h o r i z i n g
certain actions by Federal Reserve Banks d u r i n g an emergency.

4.

Reso l u t i o n relating to examinations of the S y s t e m Open Market
Account.




90

-5-

5.

Guid e l i n e s
issues.

for the c o n duct of System operations in Fed e r a l agency

6.

R e g u l a t i o n r e l ating to Op e n Market Operations of F e d e r a l Reserve
Banks.

7.

P r o g r a m for Security of FOMC Information.

8.

F e d e r a l O p e n Market Commi t t e e Rules.

B y u n a n i m o u s vote, the Authorization for D o m e s t i c Open Market
Operations,

as shown below,

was reaffirmed:

1.
The F e d eral Open Market Committee authorizes and
d irects the Federal Res e r v e Bank of N e w York, to the
extent n e c e s s a r y to carry out the most recent domestic
policy d i r e c t i v e adopted at a meeting of the Committee:
(a) To buy or sell U. S. Government securities,
i n c l u d i n g securities of the Federal Financing Bank, and
s e curities that are direct obligations of, or fully
guar a n t e e d as to principal and interest by. any agen c y of
the Uni t e d States in the open market, from or to
s e curities dealers and foreign and international accounts
m a i n t a i n e d at the Federal Reserve Bank of New York, on a
cash, regular, or d e ferred delivery basis, for the S y s t e m
O pen M a r k e t Account at m a r k e t prices, and, for suc h
Account, to exchange m a t u r i n g U. S. Government and
Federal age n c y securities with the Treasury or -the
i n dividual agencies or to allow them to mature with o u t
replacement: provided that the aggregate amount of U. S .
Gove r n m e n t and Federal agency securities held in such
Account (including forward commitments) at the close of
b u s iness on the day of a meeting of the Committee at
wh i c h a c t i o n is taken with respect to a domestic p o l i c y
dir e c t i v e shall not be increased or decreased by m o r e
than $8.0 billion d u r i n g the period commencing w i t h the
ope n i n g of business on the day following such m e e t i n g and
ending w i t h the close of business on the day of t h e next
such meeting;
(b) W h e n appropriate, to buy or sell in the open
market, f r o m or to acceptance dealers and foreign
accounts m a i n t a i n e d at the Federal Reserve Bank of New
York, on a cash, regular, or deferred delivery basis, for
the a c c ount of the F e deral Reserve Bank of N e w Y o r k at
m a rket d i s c o u n t rates, prime bankers acceptances w i t h
m a t u r i t i e s of up to nine months at the time of a c c e p t a n c e
that (1) a r ise out of the current shipment of-goods
between co u n t r i e s or w i t h i n the United States; or (2)
arise out of the storage within the United States of
goods u n d e r contract of sale or expected to move into the
ch a nnels of t r a d e w i t h i n a reasonable time and t h a t are
secured t h r o u g h o u t t h e i r life by a warehouse receipt or
similar docu m e n t c o n v e y i n g title to the u n de r l y i n g goods;




91

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6-

provided that the aggregate amount of b a n k e r s acceptances
h eld at any one time shall not exceed $100 million;
(c)
To buy U. S . Government s e c u r i t i e s . o b ligations
that are direct obligations of, or fully gua r a n t e e d as to
principal and interest by, any agen c y of t h e Uni t e d
States, and prime bankers a c c e p tances of t h e types
authorized for purchase under 1(b) above, f r o m dealers
for the account of the Federal Res e r v e B a n k - o f N e w Y o r k
under agreements for repurchase of such securities,
obligations, or acceptances in 15 cale n d a r days or less,
at rates that, unless otherwise expre s s l y a u t h o r i z e d by
the Committee, shall be determined by comp e t i t i v e
bidding, after applying reasonable limita t i o n s on the
volume of agreements with individual dealers; provided
that in the event Government securities or agency issues
covered by any such agreement are not rep u r c h a s e d by the
dealer pursuant to the agreement or a r e n e w a l - t h e r e o f ,
they shall be sold in the market or t r a n s f e r r e d to the
System Open Market Account: and provided f u r t h e r that in
the event bankers acceptances covered by any such
agreement are not repurchased by the seller, t h e y shall
continue to be held by the Federal Re serve B a n k or shall
be sold in the open m a r k e t .
2. In order to ensure the effective conduct of open
market operations, the Federal Open M a r k e t C o m m ittee
authorizes and directs the Federal Re s e r v e Banks to lend
U. S. Government securities held in the S y s t e m Open
Market Account to Government securities d e a l e r s and to
banks participating in G o v ernment sec u r i t i e s clear i n g
arrangements conducted through a Federal R e s e r v e Bank,
under such instructions as the Commit t e e m a y s p ecify f r o m
time to time.
3. In order to ensure the effective c o nduct of open
market operations, while assisting in t he p r o v i s i o n of
short-term investments for foreign and inte r n a t i o n a l
accounts maintained at the Federal Re s e r v e B a n k of N e w
York, the Federal Open Market Committee a u t horizes and
directs the Federal Reserve Bank of New Y o r k (a) for
Syst e m Open Market Account, to sell U. S. Gov e r n m e n t
securities to such foreign and i n t ern a t i o n a l accounts on
th e bases set forth in paragraph 1(a) u n d e r agreements
providing for the resale by such accounts of those
securities within 15 calendar days on terms c o m parable to
th ose available on such transactions in t he market; and
(b) for N e w York Bank account, when appropriate, to
undertake with dealers, subject to the condit i o n s imposed
on purchases and sales of securities in p a r a g r a p h 1 ( c ) ,
repurchase agreements in U. S. G o vern m e n t and agency
securities, and to arrange corr e s p o n d i n g sale and
repurchase agreements between its own a c c o u n t and for e i g n
and international accounts m a i n t a i n e d at t h e Bank.
Transa ctions undertaken with such acc o u n t s under the
provisions of this paragraph may prov i d e f or a service
fee when appropriate.




92

-

By una n i m o u s vote,
Ope r a t i ons was

7

-

the Authorization for Foreign Currency

amended to update the title of the Manager of the

S ystem Open Mark e t Account.

The Authorization,

as amended,

is shown

below:
1.
The Federal Open Market Committee authorizes__and
directs the Feder al Reserve Bank of New York, for S y s t e m
Open M a r k e t Account, to the extent necessary to carry out
the C o m m i t t e e ’s foreign currency directive and express
a u thoriz a t i o n s by the Committee pursuant thereto, and in
c o n formity wi t h such procedural instructions as the
C o mmittee may issue from time to time:
A. To p u r chase and sell the following foreign
c urrencies in the form of cable transfers through spot or
forward transa c t i o n s on the open market at home and
abroad, including transactions with the U. S. Treasury,
with the U. S. Exchange Stabilization Fund established by
Section 10 of the Gold Reserve Act of 1934. with f o r e i g n
m o n e t a r y authorities, wi t h the Bank for International
Settlements, and with other international financial
institutions:
A u s t r i a n schillings
B e l gian francs
C a nadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
J a panese yen
M ex i c a n pesos
N etherlands guilders
N o r wegian kroner
Swedish kronor
Swiss francs
B. To hold balances of. and to have outstanding forward
c o ntracts to receive or to deliver, the foreign
c urrencies listed in paragraph A above.
C. To d r a w foreign currencies and to permit foreign
banks to dr a w dollars under the reciprocal currency
a r rangements listed in paragraph 2 below, provided that
d rawings by either party to any such arrangement shall be
fully liquid a t e d within 12 months after any amount
o u t s t a n d i n g at that time was first drawn, unless the
Committee, because of exceptional circumstances,
s p e c i f i c a l l y authorizes a delay.
D. To m a i n t a i n an overall open position in all f o r e i g n
currencies not exceeding $25.0 billion.
For this
purpose, the overall open position in all foreign
c u rrencies is defined as the sum (disregarding signs) of




93
-

8

-

net positions in individual currencies. The net position
in a single foreign currency is defined as holdings of
balances in that currency, plus outstanding contracts for
future receipt, minus outstanding contracts for future
de livery of that currency, i.e.. as the sum of these
elements with due regard to sign.
2.
The Federal Open Market Committee directs, the
Federal Reserve Bank of New York to maintain reciprocal
currency arrangements ("swap" arrangements) for the
System Open Market Account for periods up to a m a x i m u m of
12 months with the following foreign banks, whic h are
among those designated by the Board of Governors of the
Federal Reserve S ystem under Section 214.5 of Regulation
N, Relations with Foreign Banks and Bankers, and with the
approval of the Committee to renew such arrangements on
maturity:

Foreign bank

Amount of arrangement
(millions of dollars
_______ equivalent)

A u st r i a n National Bank
N ational Bank of Belgium
Bank of Canada
National Bank of Denmark
Ban k of England
Ban k of France
German Federal Bank
Ban k of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Ban k of Sweden
Swiss National Bank
Ban k for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs

250
1 ,000
2 .000
250
3 ,000
2 .000
6 ,000
3 ,000
5 ,000
700
500
250
300
4,000
600
1 ,250

Any changes in the terms of existing swap arrangements,
and the proposed terms of any new arrangements that may
be authorized, shall be referred for review and
approval to the Committee.
3. All transactions in foreign currencies undertaken
under paragraph 1(A) above shall, unless otherwise
expressly authorized by the Committee, be at prevailing
market rates.
For the purpose of providing an
investment return on System holdings of foreign
currencies, or for the purpose of adjusting interest
rates paid or received in connection with swap
drawings, transactions with foreign central banks may
be undertaken at non-market exchange rates.
4. It shall be the normal practice to arrange with
f oreign central banks for the coordination of foreign

7 3 -2 9 8 0 - 9 4 - 4




94

-9-

currency transactions.
In making operating
arrangements with foreign central banks on System
h oldings of foreign currencies, the Federal Reserve
B ank of N e w Yo r k shall not commit itself to m a i n t a i n
any specific balance, unless authorized by the Federal
Open Market Committee.
Any agreements or
understandings concerning the administration o f the
accounts m a intained by the Federal Reserve B a n k of N e w
York with the foreign banks designated by the Board of
Governors under Section 214.5 of Regulation N shall be
referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested
insofar as practicable, considering needs for m i n i m u m
work i n g balances.
Such investments shall be in liquid
form, and generally have no more than 12 mon t h s
remaining to maturity.
When appropriate in c o n nection
wit h arrangements to provide investment facilities for
foreign currency holdings, U. S. Government securities
m ay be purchased from foreign central banks under
a greements for repurchase of such securities w i t h i n 30
calendar d a y s .
6. All operations undertaken pursuant to the
preceding paragraphs shall be reported p r o m p t l y to the
Foreign Currency Subcommittee and the Committee.
The
F oreign Currency Subcommittee consists of the C h a irman
and Vice Chairman of the Committee, the Vice C h a i r m a n
of the Board of Governors, and such other memb e r of the
Board as the Chairman may designate Cor in the absence
of members of the Board serving on the Subcommittee,
other Board Members designated by the Chairman as
alternates, and in the absence of the Vice Chairman of
the Committee, his alternate).
Meetings of the
S ubcommittee shall be called at the request of any
member, or at the request of the Manager of t he S y stem
Ope n Market Account, for the purposes of reviewing
recent or contemplated operations and of consulting
w i t h the Manager on other matters relating to his
r e s p o n s i b i l i t i e s . At the request of any m e m b e r of the
Subcommittee, questions arising from such reviews and
c onsultations shall be referred for determ ination to
the Federal Open Market Committee.
7.

The Chairman is authorized:

A.
Wit h the approval of the Committee, to enter
into any needed agreement or understanding wit h the
S ecretary of the Treasury about the divisi o n of
responsibility for foreign currency operations between
the System and the Treasury:
B. To keep the Secretary of the Treasury fully
advised c o n c erning System foreign currency operations,
and to consult with the Secretary on policy matters
relating to foreign currency operations:




95

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10-

C. From time to time, to transmit appropriate
reports and information to the National Ad v i s o r y
Council on International Monetary and Financial
Policies.
8. Staff officers of the Committee are authorized to
transmit pertinent information on System foreign
c urrency operations to appropriate officials of the
Treasury Department.
9. All Federal Reserve Banks shall participate in the
foreign currency operations for System Account in
accordance with paragraph 3 G(l) of the Board of
Governors* Statement of Procedure with Respect to
Foreign Relationships of Federal Reserve Banks dated
January 1, 1944.
By unanimous vote,
below,

the Foreign Currency Directive,

was reaffirmed:

1. System operations in foreign currencies shall
generally be directed at countering disorderly market
conditions, provided that market exchange rates for the
U. S. dollar reflect actions and behavior consistent
w ith the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales
of foreign e x c h a n g e .
B. M a i ntain reciprocal currency ("swap")
arrangements with selected foreign central banks and
with the Ba n k for International Settlements,
C. Cooperate in other respects with central banks
of other countries and with international m onetary
institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable
future needs for currencies.
B. To provide means for meeting System and
T r easury commitments in particular currencies, &nd to
facilitate operations of the Exchange Stabilization
Fund .
C. For such other purposes as may be expressly
authorized by the Committee.
4. System foreign currency operations shall be
conducted:
A.
In close and continuous consultation and
cooperation w i t h the United States Treasury;




as shown

96
-ii-

B. In cooperation, as appropriate,
m o n e t a r y authorities; and

with foreign

C. In a manner consistent with the obli g a t i o n s of
the United States in the International Mone t a r y Fund
regarding exchange arrangements under the IMF Article
IV.
By unanimous vote, the Procedural

Instructions w i t h respect

to Foreign Currency Operations were amended to up date the title of the
Manager of the System Open Market Account.
Instructions,

as amended,

The Procedural

are shown below:

In conducting operations pursuant to the
authorization and direction of the Federal Open Market
Committee as set forth in the Authorization for Foreign
Currency Operations and the Foreign Currency Directive,
the Federal Reserve Bank of New York, t h roug h the
Manager of the System Open Market Account ("Manager"),
shall be guided by the following procedural
u n derstandings with respect to consultations and
clearance wi t h the Committee, the Foreign Cu r rency
Subcommittee, and the Chairman of the Committee.
All
operations undertaken pursuant to such clearances shall
be reported promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or
wi t h the Chairman, if the Chairman believes that
consultation with the Subcommittee is not feasible in
the time a v a i l a b l e ) :
A. Any operation that would result in a change in
the S y s t e m ’s overall open position in foreign
currencies exceeding $300 million on any day or $600
mil l i o n since the most recent regular mee t i n g of the
C o m m i t t e e .‘
B. An y operation that would result in a change on
any day in the S y s t e m ’s net position in a single
foreign curre ncy exceeding $150 million, or $300
mil l i o n w h e n the operation is associated wit h repayment
of swap drawings.
C. A n y operation that might generate a
substantial volume of trading in a particular c u r rency
by the System, even though the change in the S y s t e m ’s
net p o sition in that currency might be less t h a n the
limits specified in IB.
D. A n y swap drawing proposed by a foreign bank
not exceeding the larger of (i) $200 m i l lion or (ii) 15
percent of the size of the swap arrangement.
2. The Manager shall clear with the Commit t e e (or
wit h the Subcommittee, if the Subcommittee believes




97
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12-

that consultation with the full Committee is not
feasible in the time available, or with the Chairman,
if the Chairman believes that consultation w i t h the
Subcommittee is not feasible in the time a v a i l a b l e ) :
A. Any operation that would result in a change in
the System's overall open position in foreign
currencies exceeding $1.5 billion since the mos t recent
regular m e e t i n g of the Committee.
B. Any swap drawing proposed by a foreign bank
exceeding the larger of Ti) $200 million or (ii) 15
percent of the size of the swap arrangement.
3.
The Manager shall also consult with the
Subcommittee or the Chairman about proposed swap
drawings by the System, and about any operations that
are not of a routine character.
The Report of Examination of the System Open Market Account,
conducted by the B o a r d ’s Division of Reserve Bank Operations and
Payments Systems as of the close of business on July 31,

1992, was

accepted.
By unanimous vote, the minutes of actions taken at the
m e eting of the Federal Open Market Committee held on December 22,
1992, were approved.
The Deputy Manager for Foreign Operations

reported on

developments in foreign exchange markets during the period December
22,

1992. through February 2, 1993.

There were no System open market

transactions in foreign currencies during this period,

and thus no

vote was required of the Committee.
The M a n ager of the System Open Market A c count reported on
developments in domestic financial markets and on System open market
transactions in government securities and federal agency obligations
during the period December 22,

1992, through Febr u a r y 2. 1993.

By

unanimous vote, the Committee ratified these transactions.
The Committee then turned to a discussion of the economic
outlook,

the ranges for the growth of money and debt in 1993,




and the

98
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13-

i mplementation of monetary policy over the interm e e t i n g period ahead.
A summary of the economic and financial information a v ailable at the
time of the meeting and of the Committee's discus s i o n is provided
below,

followed by the domestic policy directive that was approved by

the Committee and issued to the Federal Reserve B ank of N ew York.
The information reviewed at this meeti n g indicated that
economic activity rose appreciably further in the fourth quarter.
Final demands were buoyed by strength in consumption,
spending for durable equipment,

and residential construction.

M anufacturing activity also increased considerably,
appeared to be on a modest upward trajectory,
flow of announcements

of layoffs by large corporations.

on balance they

registered a small increase

for the fourth consecutive month.

notably business and health services,
nearly all of the rise in jobs.
payrolls changed little,

Service industries,

and retail trade accounted for

Manufacturing and construction,

and government employment fell as temporary

election workers were dropped from payrolls.
ment

Although

inflation was trending gradually lower.

Total nonfarm payroll employment
in December

and employment

despite a continuing

recent data on wages and prices had been mixed,
suggested that

business

rate remained at 7.3 percent,

almost

The civilian u n e m p l o y ­

1/2 percentage point below

its mid-year peak but slightly above its level at the b e ginning of the
year .
Industrial production advanced further in D ecember and was up
considerably over the fourth quarter as a whole.
assemblies

rose sharply during the quarter;

registered in business
output of computers,

equipment,

Motor vehicle

strong gains also were

partly reflecting a further jump in

and in nondurable consumer goods.

By contrast,

the production of durable consumer goods other than m o tor vehicles was




99
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14-

lower on balance after changing little over the third quarter,

and the

output of defense and space equipment remained on a downward trend.
Total u t i l ization of industrial capacity increased significantly in
the fourth quarter and for the year as a whole.
Consumer spending was up substantially in the fourth quarter.
Retail

sales,

November,

after rising sharply in October and c hanging little in

posted a further sizable increase in December.

sales gains

in the fourth quarter were reported at automotive dealers

and at building m a terial and supply outlets,
retail

The largest

stores also

recorded higher sales.

spending for services,
expenditures,

but most other types of

By contrast,

consumer

as indicated by data on personal consumption

rose more slowly.

Housing starts

surged in December,

with single family starts reaching their highest level in nearly three
years and m u l t i f a m i l y starts picking up slightly from the very low
levels of October and November.

Sales of new and existing homes

remained on a strong upward trend in December.
Real outlays

for business fixed investment apparently

registered a notable gain in the fourth quarter,
producers'

durable equipment.

particularly for

Shipments of nondefense capital goods

rose in November and December after changing little in October:
the quarter as a whole,

shipments advanced substantially,

increases w i d e s p r e a d by category.

for

with

Business purchases of cars and

trucks were up sharply in the fourth quarter, while nonresidential
construction activity

retraced a small part of a third-quarter

decline.
Business inventories expanded moderately in November as a
sizable drop in ma n u f a c t u r i n g inventories was more than offset by
increases in who l e s a l e and retail inventories.
level,

At the m a n ufacturing

the d r a w d o w n of stocks was associated with strong shipments of




100
-15-

durable goods,

and inventory-to-shipments ratios in most industries

were at or near the bottom of their recent ranges.
sector,

sizable inventory increases were

In the wholesale

reported in November for a

second straight month; most of the buildup was limited to machinery,
motor vehicles,

and miscellaneous nondurable goods.

Wit h stocks

rising in line with sales since September, the stock-to-sales ratio in
wholesaling remained at the low end of its range over the past year.
Retail inventories increased moderately further in November; the
inventory-to-sales

ratio for the sector was slightly b e l o w its average

for previous months of the year.
The nominal U.S. merchandise trade deficit widened slightly
in November.

For October and November together,

however,

the deficit

narrowed a little from its average rate in the third quarter,
value of exports rose more than the value of imports.
increase in exports was in capital goods,
and in consumer goods.

as the

Most of the

both m a c h i n e r y and aircraft,

Passenger cars accounted for a considerable

part of the rise in imports,

while the inflow of consumer goods eased

from the very strong pace of the third quarter.

Recent indicators

suggested that economic activity had remained w e a k in the major
foreign industrial countries and that unemployment
further in most of those countries.
to be continuing,

rates had increased

The recovery in Canada appeared

but the downturn in western G e r many and Japan

evidently had persisted into the fourth quarter.
A small November decline in producer prices of finished
goods was reversed in December, with a rebound in prices of finished
foods outweighing a further drop in energy prices.
other than food and energy,

advance followed six months of no change on balance:
whole,

For finished items

producer prices rose in December,

but the

for 1992 as a

this measure of prices increased by a co n s i derably smaller




101
-16-

amount than in 1991*
nonfood,

At the consumer level,

the index for prices of

non-energy items edged higher in December after somewhat

larger increases in the two preceding months.

The rise in this index

in 1992 was the smallest for any year since the early 1970s. when wage
and price controls were in effect.

Hourly compensation of private

industry workers advanced a little more rapidly in the fourth quarter
than in the two previous quarters, but the rise in total compensation
over the year as a whole was considerably smaller than in 1991.

The

slowing of labor cost increases last year occurred in both the wages
and benefits components.
At its mee t i n g on December 22, the Committee adopted a
directive that called for maintaining the existing degree of pressure
on reserve positions and that did not include a presumption about the
likely direction of any adjustments to policy during the intermeeting
period.

Accordingly,

the directive indicated that in the context of

the Committee's long-run objectives for price stability and
sustainable economic growth,
economic,
reserve

financial,

and giving careful consideration to

and monetary developments,

slightly greater

restraint or slightly lesser reserve restraint would be

acceptable during the intermeeting period.

The reserve conditions

associated with this directive were expected to be consistent with
expansion of M2 at an annual

rate of about 1-1/2 percent and with M3

remaining about unchanged on balance over the four-month period from
November through March.
Open market operations during the intermeeting period were
directed toward maintaining the existing degree of pressure on reserve
positions.

Adjustment

plus seasonal borrowing was well above expected

levels in the first two full reserve maintenance periods in the
intermeeting interval;




borrowing was sizable over the long N e w Y e a r ’s

102
-17-

weekend and also later when unusually heavy Treasury t ax receipts
drained reserves from the banking system.

The federal funds rate

averaged close to expected levels over the intermeeting period.
However,

the rate was somewhat volatile in late December as a result

of sizable swings in market factors affecting reserves and of shifting
market anticipations regarding year-end pressures.
Most other short-term interest rates declined somewhat over
the intermeeting period,
pressures.

Intermediate-

fixed-rate mortgages,

in part reflecting the passing of year-end
and long-term rates,

including those on

also moved somewhat lower; the declines occurred

in response to growing indications that any proposed n e ar-term fiscal
stimulus would be quite moderate and that the new Administration
intended to recommend steps,

possibly including new taxes,

to lower

the trajectory of the fiscal deficit appreciably over time.

Broad

indexes of stock prices exhibited mixed results over the intermeeting
period:
little,

Indexes giving heavy weight to large companies changed
while those primarily reflecting smaller companies

rose

significantly.
In foreign exchange markets,

the trade-weighted value of the

dollar in terms of the other G-10 currencies rose on balance over the
intermeeting period.

Through early January,

against both the yen and the mark,

the dollar appreciated

especially the latter,

in response

to actual and expected further declines in interest rates in Japan and
Germany.

Subsequently, the d o l l a r ’s gains were partially erased as

the prospects for near-term easing in Germany diminished somewhat and
perceptions grew that fiscal initiatives in the United States would
lower the deficit and reduce the chances that mon e t a r y policy might be
tightened in the months ahead.




103
-18-

After expanding at a moderate pace over the course of earlier
months, M2 contracted in December and January.

Some of the weakness

reflected a slowdown in Ml growth associated with lower mortgage
refinancing activity.

Within M 2 ' s nontransaction component,

the

expansion of savings and money market deposit accounts slowed
abruptly,

perhaps owing in part to the wider spread that had developed

during the fall between market rates and those paid on these accounts,
as well

as to the use of monies’ in these accounts to fund a step-up in

consumer purchases

and nonwithheld tax payments.

In addition,

the

continued attractiveness to investors of bond and stock mutual funds
might have contributed to a quickening of the runoff of holdings of
money market mutual funds and to the persisting weakness in other M2
accounts.

Appreciable declines in M3 in December and January

reflected both the contraction in M2 and reduced needs by banks for
managed liabilities at a time of weak overall credit demand.

From the

fourth quarter of 1991 to the fourth quarter of 1992. both M2 and M3
grew at rates somewhat below the lower ends of the C o m m i t t e e ’s annual
ranges.

Total domestic nonfinancial debt appeared to have expanded at

the lower end of the Committee's monitoring range for 1992.
The staff projection prepared for this meeting suggested that
economic activity would expand over the year ahead at a pace that
w ould be sufficient to reduce gradually margins of unemployed labor
and capital.

Recent declines in long-term interest

rates and more

optimistic attitudes on the part of businesses and households were
e xpected to support further solid gains in business fixed investment
and in homebuying.

Continuing progress in reducing debt service

burdens and a gradual lessening of concerns regarding job security
were projected to foster an expansion of consumer spending a shade
faster than the growth in incomes.




Export demand would be damped for

104
-

19-

some period of time by the appreciation of the dollar since m i d - 1992,
but an anticipated pickup in growth abroad later this year would begin
to counteract the effects of the higher dollar.

Against the

background of considerable uncertainties associated wit h still
unannounced fiscal policy initiatives,

the staff retained for this

forecast the assumption contained in several previous forecasts that
fiscal policy would remain mildly restrictive,
declining defense outlays.

largely because of

The persisting slack in resource

utilization over the forecast horizon was expected to be associated
with some additional progress

in reducing inflation.

In the Com m i t t e e ’s discussion of current and prospective
economic developments,

the members were encouraged by the mounting

evidence of appreciable m o mentum in the economic expansion.
whole,

On the

recent developments tended to reinforce their forecasts of

continuing growth at a moderate pace over the year ahead,
in light of the improvement

impact of some retarding influences on the expansion,
balance sheet adjustment activities,
addition,

while some major

The

notably various

appeared to be waning.

In

sectors of the economy such as defense

spending and commercial construction remained weak,

the economy was

b e nefitting from considerable growth in consumer spending,
business expenditures for producer equipment,
outlays for housing.

especially

in business and consumer confidence.

In one view,

from rising

and from increasing

the recent behavior of commodity

prices also tended to indicate some strengthening in the e c o n o m y ’s
expansion.
expansion,

Despite various indications of a more firmly established
however,

the members felt that the outl o o k remained subject

to a good deal of uncertainty,

and some commented that substantial

de viations--in either direction--from their current forecasts could
not be ruled out.




It was noted in this connection that the specifics

105
-

20-

of the President's fiscal policy proposals were still unknown,

and

their reception by the public and the Congress would have a major
influence on confidence,
economy.

interest

rates,

and the performance of the

Other sources of uncertainty related to the outlook for

further restructuring activities that involved cutbacks in operations
and employment by many firms,
banking institutions.

and the prospective lending policies of

With regard to the outlook for inflation,

most

of the members believed that some further progress toward stable
prices was likely over the year ahead,

given an economic outcome about

in line with their forecasts of continued,

albeit reduced, margins of

unutilized or underutilized productive resources.

Some members also

referred to the extended period of relatively sluggish growth in the
broad measures of money as a favorable indicator in the outlook for
inflation.
In keeping with the practice at meetings whe n the Committee
establishes its long-run ranges for growth of the mon e y and debt
aggregates,

the Committee members and the Federal Reserve B a n k

presidents not currently serving as members had prepared projections
of economic activity,
1993.

the rate of unemployment,

and inflation for

The central tendencies of the forecasts pointed to slightly

faster economic

growth this year than currently seemed to have

occurred in 1992.

The anticipated rate of economic expansion would be

at a pace that was rapid enough to reduce the rate of unemployment a
little further.
persisting,

Nonetheless,

with some slack in productive resources

price and cost pressures would remain subdued and modest

additional moderation in inflation was expected by most members.
Measured from the fourth quarter of 1992 to the fourth quarter of
1993. the forecasts for growth of real GDP had a central tendency of 3




106
-

21-

to 3-1/4 percent within a full range of 2-1/2 to 4 percent.

Projec­

tions of the civilian rate of unemployment in the f ourth quarter of
1993 were concentrated in the upper half of a 6-1/2 to 7 percent
range.

For the CPI, the central tendency of the forecasts for the

period from the fourth quarter of 1992 to the fourth q u arter of 1993
was centered on increases in a range of 2-1/2 to 2-3/4 percent,

and

for nominal GDP the forecasts were clustered in a range of 5-1/2 to 6
percent

for the year.
In the course of the C o m m i t t e e ’s discussion of various

factors underlying the outlook for economic activity,

the m e mbers

observed that* on the whole the effects of a number of structural
impediments to the expansion seemed to be diminishing as the financial
condition of households, business firms,
continued to improve.
eased substantially,

and financial institutions

Household and business debt-service burdens had
but it remained difficult to predict t o what

extent and for how long the ongoing balance sheet adjust m e n t s would
continue to divert an unusual proportion of cash flows from spending
to balance sheet repair.

Improved profitability and n e w c a p i t a l -

market issuance had strengthened the capital positions of banking
institutions,

and in genexal they were now in a m u c h b etter position

to augment their len d i n g activities.

However, there w e r e few

indications thus far of any easing in terms or standards on business
loans,

and the depressed and uncertain values of c ommercial mortgages

and real estate held in bank portfolios might continue to exert an
inhibiting effect on the willingness of banks to lend.

Another

negative factor was the persistence of downsizing and other
restructuring activities by numerous firms,

notably large businesses.

Such restructuring activities had not fully run their cou r s e as m a n y
firms continued to pare excess production capacity and to m o d e r n i z e




107
-

pro d u c t i o n facilities to meet
fo r e i g n markets.

22 -

strong competition in domestic and

The resulting layoffs had damped overall job growth.

Despite tepid job growth,

retail sales had strengthened

m a r k e d l y during the closing mo n t h s of 1992.

and several members

commented that such sales had continued to di splay surprising vigor in
some parts of the country during the early weeks of 1993.
the improvement in consumer sentiment,

Apart from

other favorable factors cited

wit h regard to thte butlook'for consumer spending included lower debtservice burdens and the capital gains or enhanced cash flows n o w being
realized as sales of hom e s picked up and mortgage refinancings again
strengthened.

Some members nonetheless expressed a degree of concern

about the sustainability of the gains in consumer spending unless
t h ere were faster growth in employment and income to support such
spending.

Announcements by prominent firms of cutbacks in their

work f o r c e s had continued into the new year,
other firms,

and while job gains at

especially smaller ones, were contributing to modest net

g rowth in overall employment,

the publicity surrounding the persisting

job cutbacks and a tendency for many new jobs to be lower-paying, added
an element of caution to the outlook for consumer expenditures.
balance,

wit h the measured saving rate already at a low level,

an argument

On
though

could be made that the actual rate was somewhat higher

t h a n indicated by the currently published data,

consumer spending

s eemed likely to expand about in line w i t h the growth in consumer
i ncomes over the coming year.
The growth in consumer incomes in turn was likely to depend
i m p o r t a n t l y on the expansion in business investment spending,

and

m e m b e r s cited a number of factors that were expected to provide a
f avor a b l e setting for sustained mome n t u m in such spending over the
year ahead.




These included the strengthening of final demands,

the

108
-

recent declines in intermediate-

23-

and long-term interest

rates, the

greater leeway for financial intermediaries to increase their lending
to businesses,

and a continuing desire by business firms to improve

their operating efficiencies.
however,

Commercial construction activity,

was likely t o ‘remain quite sluggish.

There wer e indications

that commercial real estate values had stabilized in a number of
areas, but at low levels,

and given the persistence of mar k e d

imbalances in numerous real estate markets that were t he result of
several years of overbuilding,

a significant rebound in commercial

building activity for the nation as a whole might well be several
years away.
promising.

The outlook for housing construction was m u c h more
Against the background of a general upswing in consumer

confidence and the improved balance sheets of man y households,

the

declines that had occurred in mortgage interest rates had fostered a
m arked strengthening in the demand for single-family h o u s i n g as
evidenced by reports from many parts of the country as well as the
overall statistics on housing.

On the basis of these developments,

the members anticipated a continuing impetus to the e conomic expansion
from housing construction and from related industries over the year
ahead.

In addition,

business inventories,

the current indications of generally lean
associated in part with strong final demands

over the past several months,

suggested that the prospects for further

gains in overall spending were likely to stimulate efforts by business
firms to build up inventories over the quarters ahead.
The increasing signs of slow growth or recession in a number
of foreign nations represented a greater downside r isk to t he demand
for U.S.

exports than had been apparent earlier.

example,

that firms engaged in business activities abroad were

It w as noted,

reporting substantial deterioration in markets for U.S.




for

goods in many

109
-24-

foreign countries.
the year ahead,
U.S.

Growth in U.S.

exports might remain positive over

but against the background of a relatively expansive

economy and the d o l l a r ’s recent appreciation,

the value of

exports might well fall increasingly short of that of imports with
adverse effects on the growth of U.S.

economic activity.

Turning to the outlook for fiscal policy, members were
encouraged by the prospect that the President would soon propose a
program that would produce substantial reductions in the federal
deficit over the years ahead.
deemed credible,

Such a deficit -reduction program,

could result in lower intermediate-

if

and long-term

interest rates than would otherwise pr e v a i l - - even before the program
was enacted --with very positive implications for interest-sensitive
expenditures.

For the nearer term,

the President was expected to

announce some modest fiscal stimulus relative to what was currently in
train.

However,

the specifics of the President's proposals were not

yet known and there was little current basis on w h i c h to judge
prospective public and Congressional reactions.
the critical need for long-term deficit

Members emphasized

reduction,

and some expressed

concern about the adverse effects on financial markets if fiscal
stimulus measures were to be enacted for the short

run without the

assurance of further legislation to cut federal deficits over time.
With regard to the outlook for inflation, most of the members
anticipated that the trend toward lower price and wage inflation would
be sustained over the year ahead,

and one member observed that the

disinflationary mo m e n t u m in the economy might well be underestimated.
Favorable developments relating to the outlook for inflation included
evidence of slowing increases in labor costs and continued aggressive
efforts by many business firms to improve productivity and reduce
costs in the face of intense competition from domestic and foreign




110
-25-

producers.

Indeed,

anecdotal reports from around the country

continued to suggest little or no upward pressure on prices in m a n y
regions.

In addition,

the behavior of interest rates in l o n g er-term

debt markets was consistent with spreading expectations of gradually
d i minishing inflation.

Some members believed, however,

that little or

no further progress in reducing inflation was a more likely outcome in
the year ahead,

though none anticipated higher inflation.

commodity price indexes had edged higher recently,

Some

apparently in

response to growing demands related to strengthening activity in
several

sectors of the economy.

Lumber prices in particular had risen

co nsiderably in conjunction with the uptrend in single-family housing
c onstruction and various constraints on lumber supplies.

Some

business contacts reported for the first time in a long while that
they were experiencing or anticipated some upward pressure on their
raw materials prices.

Further, while most business contacts saw or

anticipated little or no upward pressure on prices in their own
industries, m a n y continued to expect rising inflation more generally.
The still

relatively steep slope of the yield curve and its

i mplications with regard to expectations of future increases in
interest

rates also suggested that investors remained concerned about

the possibility of higher inflation over the longer run, even t hough
such concerns m i ght have abated somewhat recently and did not appear
to extend to the next year or two.

In general,

however, the members

viewed the inflation outlook with considerable optimism on the
p r esumption of favorable fiscal and monetary policy developments.
In k e eping with the requirements of the Full Employment and
B alanced G r owth Act of 1978

(the Humphrey-Hawkins Act),

the Committee

at this m e e t i n g reviewed the ranges for growth of the m o n e t a r y and
debt aggregates in 1993 that it had established on a tentative basis




I ll
-26-

at its meeting on June 30-July 1. 1992.

The tentative ranges included

expansion of 2-1/2 to 6-1/2 percent for M2 and 1 to 5 percent for M3,
measured from the fourth quarter of 1992 to the fourth quarter
1993.

of

The monitoring range for grovth of total domestic nonfinancial

debt had been set provisionally at 4-1/2 to 8*1/2 percent for 1993.
All of these ranges were unchanged from those that the Committee had
set for 1992 at its meeting in February of last year and had r e a f ­
firmed at mid-year.

When the provisional ranges for m o n e y grovth were

established, the Committee had noted that they were especially
tentative and subject to revision in the latter part of 1992 or early
1993 owing to the considerable uncertainty about the evolving
relationship of money to income.
In the event,

the velocities of M2 and M3 had increased

appreciably in the second half of 1992 and analysis

of the factors

behind this development suggested further increases

in the year ahead.

Consequently,
M2,

in the C o m m i t t e e ’s discussion,

which tended to focus on

all the members indicated that they could support a proposal to

lower the tentative ranges for grovth of the broad m o n etary aggregates
by one-half percentage point
members

for

1993.

At the same time,

a number of

indicated that they preferred somewhat different ranges

including the retention of the tentative ranges,
by more than the proposal,

l owering the ranges

and widening or na r r o w i n g them.

All the

members were in firm agreement that the purpose of the proposed
reductions was not to signal or implement any change in mone t a r y
policy or to convey any intention to move away from the Committee's
commitment to m a x i m u m sustainable economic expansion.

Rather,

the

reductions were motivated by the persistence of m arked shortfalls in
the growth of M2 and M3 from their historical

relationships w i t h

various measures of aggregate economic performance:




those shortfalls

112
-27-

appeared to be the technical

result of forces that are altering the

relationship between m o n e y and income.

Members

of the Committee urged

that the B o a r d ’s report to Congress and the Chairman's accompanying
testimony make clear the reasons for the unusual behavior of money and
its consequences for the C o m m i t t e e ’s choice of ranges.
-

The deviations in monetary growth from historical norms

reflected a number of developments whose relative importance and
intensity had shifted to some extent over the course

of recent years,

but in general they had served to rechannel funds away from depository
institutions,

and the associated weakness in deposit

v elocity--the ratio of nominal GDP to money.

growth had raised

The result was the need

for lower m o ney growth than in the past to support a given rate of
income

growth.

Among the developments that had tended to retard the

relative growth of M2 and M3 was the unprecedented steepness of the
yield curve that had prompted large shifts of funds by savers from M2
accounts to higher-yielding intermediatethe same time,

and long-term assets.

At

credit growth at bank and thrift depository

institutions had been weak,

partly as a result of efforts by these

institutions to improve capital and liquidity positions,
owing to weak demand.

As a consequence,

and partly

they also had maintained

relatively l c * offering rates on deposits that had provided consumers
with an incentive to reduce or hold down their deposit holdings in
order to pay down relatively high cost mortgages and other debts.
1992,

In

sluggish growth of M2 and M3 had been associated with a

c onsiderable acceleration in nominal spending.

Indeed,

of both M2 and M3 at rates below the Commi t t e e ’s ranges,

despite growth
the expansion

of the economy had exceeded most forecasts.
The members generally anticipated that the intensity of these
forces might diminish in 1993 as borrowers and lending institutions




113
-28-

achieved more comfortable balance sheet positions.

Nonetheless,

the

relative weakness in money growth was seen as likely to persist to a
marked extent.

The yield curve,

while it had flattened a bit

recently, was still expected to provide a considerable incentive for
many savers to shift funds out of M2 assets,

especially as relatively

high-yielding time deposits continued to mature.

In addition,

banks

were likely to remain generally unaggressive in bidding for deposits,
in part because their substantial earlier acquisitions of securities
would permit them to accommodate some of the anticipated growth in
loan demand by selling securities or limiting purchases.
circumstances,

In these

restrained money growth seemed likely to remain

consistent with relative strength in the economic expansion.
The members recognized that the strength of the factors that
were expected to continue to depress broad mon e y growth in relation to
income in 1993 was still subject to considerable uncertainty,

and this

implied the need for flexibility in assessing the i m p lications of
money growth relative to the Committee's ranges.

Should the factors

influencing the behavior of the broad aggregates persist in hol d i n g
down money growth to the extent seen in 1992.

expansion of M2 and M3

in the lower portion of their reduced ranges would be consistent with
considerable further growth in nominal spending.
from the reduced ranges could not be ruled out.

Indeed,

a shortfall

and one m e m b e r felt

that the potential for such a development warranted c o n sideration of a
somewhat larger reduction in the M2 range;

such a reduction also would

signal more clearly the C o m m i t t e e ’s commitment to price stability.

On

the other hand, the upper portions of the reduced ranges would still
accommodate an ample provision of liquidity to support further
economic expansion even if the growth of mone y and of income were to
move toward an historically more normal alignment and Velo c i t y w ere to




114
•29-

slow from its high rate of increase*

In one view, w i d e n i n g the

t entative M2 range by reducing its lower limit while retaining its
upper limit would help the Committee to convey its views regarding the
potential for a continuing but acceptable sluggishness in M2 growth
while leaving room for the possibility of faster M2 exp a n s i o n should
changing circumstances foster diminishing strength in velocity.
Another member expressed a preference for narrowing the tentative
range by lowering only its upper limit as a means of signaling the
Committee's intent to resist both inflationary and recessionary
developments.

In light of the uncertainties that were involved,

the

informational content of the aggregates probably had d i m inished and in
any event the Ccimnittee would need to continue to evaluate mone t a r y
growth developments in the context of a careful assessment of a wide
variety of other financial,
connection,

m agnitude that,
of different
appropriate
ranges

economic,

and price developments.

In this

one member observed that the uncertainties were of such a
while plausible arguments could be made for a number

ranges,

retention of the tentative ranges would be

in light of the C o m m i t t e e ’s willingness to review the

in the event that unanticipated developments wer e to unfold.
All of the m e m bers agreed that it would be desir a b l e to

retain the m o n i ' o r i n g range of 4-1/2 to 8*1/2 percent that the
Committee had established on a provisional basis for t h e growth of
total domestic nonfinancial debt in 1993.

The expansion in such debt

had not been damped by special forces to the same extent as the broad
m onetary aggregates in 1992.

Over the year ahead, g rowth in the

federal debt was likely to remain substantial,
debt in the nonfederal

and the expansion of

sectors was projected to accelerate somewhat

given the continued improvement in borrower balance

sheets and an

a nticipated increase in the willingness of financial institutions to




115
-30-

l«>ni as the economy continued to expand.

Nonetheless,

in the context

of still cautious attitudes on the part of bo t h borrowers and lenders,
the growth of nonfederal debt probably would remain bel o w that of
nominal GDP in the year ahead.
At the conclusion ot the Committee's discussion,
members

all of the

indicated that they favored or could accept a t e chnical

downward adjustment of one-half percentage point in the tentative
ranges for the broader monetary aggregates for 1993 to rates of 2 to 6
percent

for M2 and 1/2 to 4-1/2 percent for M3.

It was agreed that

there should be no change from the tentative range for total domestic
nonfinancial debt.

In keeping with the Committee's usual procedures

under the Humphrey-Hawkins Act.
midyear,

the ranges would be

or sooner if deemed necessary,

reviewed at

in light of the growth and

velocity behavior of the aggregates and ongoing economic and financial
developments.

Accordingly,

by unanimous vote,

the f o llowing longer-

run policy for 1993 was approved by the Committee for i n c l u s i o n in the
domestic policy directive:
The Federal Open Market Committee seeks monet a r y
and financial conditions that will foster price s t a ­
bility and promote sustainable growth in output.
In
furtherance of these objectives, the Committee at this
meeting established ranges for growth of M2 and M3 of
2 to 6 percent and 1/2 to 4-1/2 percent respectively,
measured from the fourth quarter of 1992 to the fourth
quarter of 1993.
The Committee expects that d e v e l o p ­
ments contributing to unusual velocity increases are
likely to persist during the year.
The. monito r i n g
range for growth of total domestic nonfinancial debt
was set at 4-1/2 to 8-1/2 percent for the year.
The
behavior of the monetary aggregates will continue to be
evaluated in the light of progress toward price level
stability, movements in their velocities, and
developments in the economy and financial markets.
Turning to policy for the intermeeting period ahead,

all of the

members endorsed a proposal to m a intain unchanged conditions in
reserve markets,




and all indicated that they could ac3ept a d irective

116
- SI -

that did not incorporate any presumption with regard to the likely
direction of possible intermeeting adjustments to policy.

While there

was concern about the weakness in the monetary aggregates,

the members

generally agreed that recent economic developments t e nded to reinforce
the view that mon etary policy was on an appropriate course.

The

economy seemed to be on a stronger growth track than earlier in the
expansion,

and inflation remained quite subdued--only a bit above some

estimates of price stability--and likely to moderate further in coming
quarters in the view of most members.

Some commented that a further

easing move at this juncture might well have adverse effects on
inflation sentiment and on interest rates in intermediate*
term debt markets.

and l o n g ­

A few referred to the recent firming in some

commodity prices and the consensus among private forecasters that
inflation could drift higher over the next few years.
one member,

In the v iew of

these developments might argue for a tilt in the directive

toward possible restraint,

but they did not call for an immediate

tightening in reserve conditions.
A staff analysis prepared for this meeting suggested a resumption
of some growth in the broad measures of money later in the first
quarter but a decline in both M2 and M3 for the quarter as a whole.
W hile part of the declines appeared to reflect reflect difficulties
with seasonal adjustments and the ebbing of special factors that
previously had boosted growth,

the uncertainties surrounding the

behavior of these aggregates tended to reduce their role in current
monetary policy.

N e v e r t h e -l e s s . there was concern about the

p ersisting weakness in the broad aggregates,
that they would fall well
first part of the year.

including the likelihood

short of the Committee's n e w ranges over the
Some members also noted that the growth of

#

Ml, while still fairly robust in December and January,




was m arkedly

117
-

b e l o w its pace over most of 1992.

32-

On the other hand, bank loans had

increased in recent months, and the weakness in the m o n etary
aggregates did not appear to reflect underlying softness in the
economy.

In these circumstances,

a number of mem b e r s believed that

any effort to stimulate monetary growth under immediately prevai l i n g
economic conditions and market expectations might well prove to be
counterproductive.

An easing at this time could accelerate outflows

from interest-sensitive M2 assets if the easing were seen as signaling
a weake n i n g of the S y s t e m ’s anti-inflationary resolve and were to
result in higher rates on intermediate-

and l o n g -term debt securities.

At the conclusion of the Committee's discussion,

all of the

m e m b e r s indicated that they favored a directive that called for
ma i n t a i n i n g the existing degree of pressure on reserve positions.
They also noted their preference for.

or acceptance of, a dir e c t i v e

that did not include a presumption about the likely dir e c t i o n of any
adjustment to policy over the intermeeting period.

Accordingly,

in

the context of the C o m m i t t e e ’s long-run objectives for price stability
and sustainable economic growth,
economic,
that

financial,

and giving careful c o n s i d eration to

and monetary developments,

the Committee decided

slightly greater or slightly lesser reserve restraint w o uld be

acceptable during the intermeeting period.

The reserve conditions

contemplated at this meeting were expected to be consistent w ith
l i ttle change in the levels of M2 and M3 over the two-month period
from January through March.
By unanimous vote,
authorized and directed,

the Federal Reserve Bank of N ew Y o r k was
until otherwise directed by the Committee,

e x ecute transactions in the System Account in accordance w i t h the
follo w i n g domestic policy directive:
The information reviewed at this m e e t i n g indicates
that economic activity rose appreciably further in the




to

118
-33-

fourth quarter.
Total nonfarm payroll employment
registered another small increase in December, and the
civilian unemployment rate remained at 7.3 percent.
Industrial production posted solid gains over the
closing mont h s of the year.
Retail sales were up
substantially in the fourth quarterr and residential
c o n struction activity increased sharply.
Indicators of
business fixed investment suggest a notable gain in
recent months, particularly for producers’ durable
equipment.
The nominal U.S. merchandise trade deficit
narrowed slightly in October-November from its average
rate in the third quarter.
Recent data on wages and
prices have been mixed but they continue to suggest on
balance a trend toward lover inflation.
Interest rates have declined somewhat since the
Committee m e eting on December 22.
In foreign exchange
markets, the trade-weighted value of the dollar in
terms of the other G-10 currencies rose on balance over
the intermeeting period.
M2 appears to have contracted in December and
January, after expanding at a moderate pace over the
course of previous months; M3 is estimated to have
declined appreciably in both months.
From the fourth
quarter of 1991 to the fourth quarter of 1992, b o t h M2
and M3 grew at rates somewhat below the lower ends of
the C o m m i t t e e ’s annual ranges for 1992.
Total domestic
no n financial debt appears to have expanded at the lower
end of the Committee's monitoring range for the year.
The Federal Open Market Committee seeks m onetary
and financial conditions that will foster price s t a ­
bility and promote sustainable growth in output.
In
furtherance of these objectives, the Committee at this
m e e t i n g established ranges for growth of M2 and M3 of
2 to 6 percent and 1/2 to 4-1/2 percent respectively,
measured from the fourth quarter of 1992 to the fourth
quarter of 1993.
The Committee expects that d e v e l o p ­
ments contributing to unusual velocity increases are
likely to persist during the year.
The monitoring
range for growth of total domestic nonfinancial debt
was set at 4-1/2 to 8-1/2 percent for the year.
The
behavior of the mone t a r y aggregates will continue to be
evaluated in the light of progress toward price level
stability, movements in their velocities, and
de v e l opments in the economy and financial markets.
In the implementation of policy for the immediate
future, the Committee seeks to maintain the existing
degree of pressure on reserve positions.
In the
context of the C o m m i t t e e ’s long-run objectives for
price stability and sustainable economic growth, and
giving careful consideration to economic, financial,
and m o n e t a r y developments, slightly greater reserve
restraint or slightly lesser reserve restraint w o u l d be
acceptable in the intermeeting period.
The c o n t e m ­
plated reserve conditions are expected to be consistent




119
-3 4 -

wit h little change in M2 and M3 over the period from
J anuary to March.
At this meeting the Committee discussed a preliminary report

of a

subcommittee that had been established to examine various issues
relating to the release of information about Committee meetings and
decisions.

All of the members agreed that the Committee should keep

the public as fully informed as possible about its monetary policy
decisions and their rationale.

Such information could reduce

uncertainty about the stance of policy and about the factors the
Committee takes into account in reaching its decisions.

However,

release of information should not be allowed to compromise the
overriding objective of making and implementing the best possible
decisions.
process

In that regard,

the Committee noted that its deliberative

requires a free flow of ideas,

advance or question hypotheses,

including the ability to

to speculate on alternative outcomes,

and to change opinions in response to the views expressed by other
members.

The members also needed to feel at liberty during meetings

to use a wide array of information that is obtained on a confidential
basis;

at least some of that information would no longer be provided

to the Committee if there were a risk of public disclosure.

Moreover,

the Committee wanted to give further consideration to the risk that
the adoption of a different schedule for releasing information about
policy decisions might have the effect,

in difficult circumstances,

of

reducing its willingness to make needed policy adjustments promptly.
No decisions were made at this meeting concer n i n g various options

for

apprising the public more fully or promptly of the Committee's
actions, and it was understood that the subcommittee would continue to
study the matter.




120
-35-

It was agreed that the next meeting of the Committee would be
held on Tuesday,

March 2 3 .

1993.

The m e e t i n g adjourned.




Secretary

121
F o r u s e a t 10 a . m . , EDT
T u e s d a y , O c t o b e r 1 9 , 1993

S ta te m e n t o f

D a v id W. M u l l i n s , J r .
V i c e C h a irm a n
B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s te m
W a s h in g to n , D. C .

H e a r in g o n I s s u e s R a i s e d b y HR 28
" F e d e r a l R e s e r v e S y ste m A c c o u n t a b i l i t y A c t o f

1993”

C o m m itte e o n B a n k in g , F i n a n c e a n d U r b a n A f f a i r s
U .S . H o u se o f R e p r e s e n t a t i v e s




O cto b e r

19,

19 93

122
C h a irm a n G o n z a l e z ,
C o m m it te e .

I a p p r e c ia te y ou r in v it a t io n

th a t p o r tio n

o f H .R .

28,

A c c o u n ta b ility A c t ,"
o ffe r
both

C on gressm an L e a c h ,

th is

d e a l i n g w it h d i s c l o s u r e .

an d o u t s i d e

B e fo r e

I a r r iv e d

i n W a s h in g t o n ,

fin a n c ia l

e c o n o m ic s f o r

p r o fe s s io n a l w r itin g s
m arket p a r t i c i p a n t s
r e fle c t

t o r e p o r t my v i e v s

W a s h in g t o n ,

s e r v in g

I t a u g h t an d c o n d u c t e d
ov e r a d eca d e.

a b s o r b an d i n t e r p r e t

F ederal R eserv e,
in t e llig e n c e

in

a v a r ie ty

on t h e c o n d i t i o n

o f p o lic y

array o f

c o n c e iv a b le

an d t h e o p e r a t i o n s

fo r e ig n

o ffe r

w hat o f t e n

t h e m em bers o f t h i s

cu rren t r o le ,

p rocess

and th e n

a t t h e T r e a s u r y an d t h e
of

c o n fid e n tia l

in s titu tio n s ,
fo r

th e

a w id e

t h e v ie w s o f o t h e r a g e n c i e s ,

o ffic ia l

th e C on gress,

r e g u la to r s ,

I w o u ld r e s p e c t f u l l y

fin a n c ia l

in s tit u t io n s .

I have

i n m e e tin g s w it h o t h e r o f f i c i a l s
th e T rea su ry ,

an d s t a f f

an d b a n k in g

as w e ll as r e p r e s e n ta tiv e s o f

g o v e rn m e n ts and i n t e r n a t i o n a l

d e lib e r a tiv e

jo b s

of

in fo r m a tio n

c o n t in g e n c y p la n s

e m e r g e n c ie s ,

of

o f th e F ed era l R eserv e,

F ir s t,

of

o f fin a n c ia l

in s tr u m e n ts ,

p a r tic ip a te d

an d s e c u r i t i e s

Many o f my

As a p o lic y m a k e r in

I have been exposed t o th e flo w

s e ttin g s

to

fr o m my c a r e e r

e x p lo r e d th e e s tim a b le a b i l i t y

to

on

t h e B e ltw a y .

t h a t k n o w le d g e in m a rk et p r i c e s .

r o u tin e ly

I w o u ld l i k e

C o m m it te e a p e r s p e c t i v e t h a t w as g a i n e d

in

th e

" T h e F e d e r a l R e s e r v e S y s te m

in s id e

research

an d m em bers o f

in s titu tio n s .

From t h i s

fo r e ig n

e x p e r ie n c e

th ree p o in ts .

m ak es new s i s

n o t a lw a y s i n f o r m a t i v e .

p a n e l a r e w e ll a w a re, p a r t o f t h e
is

a c t u a lly th in k in g o u t lo u d .

I n my

w h e t h e r i n m e e t i n g s o f t h e B o a r d o r t h e FOMC o r




As

in

123
2
le s s

fo r m a l s e t t i n g s ,

I r o u tin e ly

en g a ge in

who a r e c o n c e r n e d a b o u t t h e n a t i o n ' s
on p o s s i b l e

p o lic y

o p tio n s ,

d ia lo g u e s w ith o t h e r s

in te r e s t,

p la n n in g f o r

e x c h a n g in g v ie w s

c o n t in g e n c ie s t h a t none

o f u s h o p e w i l l happen b u t t h a t m ust n o t c a t c h u s u n p r e p a r e d ,
c o n t e m p l a t i n g t h e m a r k e t 's r e a c t i o n

t o w h a t we m ig h t d o .

and

H u ch o f

th e jo b o f a c e n t r a l ban k er in v o lv e s w o r r y in g a b o u t e v e n ts t h a t
h a ve a s m a ll p r o b a b i l i t y
co sts

o f occu rren ce,

b u t w o u ld

im p o s e l a r g e

o n t h e f i n a n c i a l s y s t e m an d t h e e c o n o m y w e r e t h e y t o

U n fo r tu n a te ly ,

th e p u b lic r e le a s e o f

serve to

fo c u s a t te n tio n

o p in io n ,

th e fe a r s abou t in d iv id u a l

s u c h d i s c u s s i o n s w o u ld o n l y

on th e s e n s a t io n a l— th e d i f f e r e n c e s

co n ce rn s ab ou t w o r s t-c a s e

in s titu tio n s ,

in

an d t h e

s c e n a r i o s — t h a t n o r m a lly h a v e l i t t l e

co n se q u e n ce on n e t t o th e s e t t i n g
d i s t r a c t p e o p le

occu r.

o f p o lic y

a n d t h a t w o u ld

fr o m m ore fu n d a m e n t a l i s s u e s ,

a lm o s t c e r t a i n l y

h e ig h t e n in g m arket v o l a t i l i t y .
S e c o n d ly ,
lik e ly

an d t h i s

g e n e r a liz in g

s h a r e w i t h a n y o n e who h a s s a t

p ro s p e c t o f d e ta ile d
o n som e p r o c e e d i n g s .
w ord,

is

fr o m a f r u s t r a t i o n

i n many p u b l i c m e e t i n g s ,

and c o m p l e t e e x p o s u r e t e n d s t o
A s p e a k e r h a s t o w e ig h t h e

g u a rd in g a g a in s t t h e p o s s i b i l i t y

th a t

in o p in io n o r c o n d itio n a l s p e c u la tio n s w i l l
n ew spapers.

One p o s s i b l e

h e a d lin e s

th a t th e c r i t i c a l

th e

is

s id e lin e s ,

ou tcom e o f

con cern

is




th is

s u b tle

th a t th e q u a lit y

th e

cast a c h ill

e ffe c ts

of

every

d is tin c tio n s

be s p la s h e d a b o u t th e

fe a r o f u n fo r tu n a te

con d u ct o f p o lic y

g e t s push ed o n to

w h ere fe w e r p e o p le c a n p a r t i c i p a t e .

c o u ld b e le s s p u b lic d is c lo s u r e

th a t I

o f th e p o lic y

The r e s u l t

p rocess.

My c h i e f

o f p o l i c y m a k i n g w o u ld s u f f e r ,

w ith

124
3
a d v erse con se q u en ces
a d e lib e r a tiv e
oth er,

fo r

th e n a tio n .

I f t o o m any p a r t i c i p a n t s

g r o u p s p e a k t o t h e r e c o r d r a t h e r th a n t o

in

each

in n o v a tiv e

id e a s d o n o t g e t t h e i r due and t h e s e a r c h f o r

con sen su s s e t t l e s

t o o q u ic k ly on th e s t a t u s qu o o r th e e a s i e s t ,

th ou g h n o t t h e b e s t ,
T h ir d ,

It

is

th o se

cou n ts.

our a c tio n s
a c tio n s

c o n d itio n s

t h e m on eta ry p o l i c y

Our a c t i o n s m a t t e r ,

th a t a ffe c t

a r e m ade p u b l i c

fo r

is

n o t our d e lib e r a t io n s .

i n t e r e s t r a t e s and t h e econ om y,
im m e d ia t e ly .

an d

C hanges in r e s e r v e

t h e o p e n fo r u m o f t h e f i n a n c i a l m a r k e t .

th e a c t io n

th a t a re r e le a s e d
an d d i s s e n t s
an n ou n ced.

are

la id

s ix

ju s t

w eeks l a t e r ,

e x p la in e d .
To p r o v id e

C h a irm a n o f t h e
m em bers o f t h e

are t a llie d

D is c o u n t r a t e ch a n g es a re a l s o p u b l i c l y
to C on gress,

th e

a s e m ia n n u a l r e v i e w

d e c is io n s ,

fo r

c o m m itte e s o f

p o lic y .

M e a n w h ile ,

p o lic y

th e

a summary o f t h e

f o r t h e c o m in g y e a r .

m em bers o f t h e B o a r d ,

an d o f f i c i a l s

C on gress t o
S y s te m

On a m o re

R e s e r v e B ank

o f t h e F e d e r a l R e s e r v e S y s te m o f t e n
d i s c u s s a s p e c t s o f m on eta ry

s t a f f p ro d u ce a s te a d y strea m

t h e e c o n o m y an d c r i t i q u e s




in

to

o f m em bers o f t h e B o a r d an d R e s e r v e B ank

an d p l a n s

b e fo re

a n a ly s e s o f

v o te s

B a n k in g C o m m itte e an d t h e i r c o u n t e r p a r t s

s c h e d u le ,

p r e s id e n t s ,

an d a l l

a b r o a d e r o v e r v ie w

F ed era l R eserve o ff e r s

e c o n o m ic f o r e c a s t s
p r e s id e n ts ,

T he

o u t i n t h e m in u t e s o f t h e m e e t in g

S e n a te e n c o m p a s s in g r e c e n t p o l i c y

ir r e g u la r

p rocess

a r e t r a n s p a r e n t t o t h e m a r k e t b y 1 1 :3 0 am o n t h e d a y

o f th e ch an g e in
reason s

s o lu tio n s .

fr o m my e x p e r i e n c e ,

op en w h ere i t

a

o f p o lic y

th a t are

of

s it

125
4
p u b lis h e d
and t h e

in

th e

F e d e r a l R e s e r v e B u l l e t i n , R e s e r v e B ank R e v i e w s ,

a c a d e m ic p r e s s .

T o sum u p my v i e w s o n t h e
con cern

is

th e q u a lity

d epen ds upon th e e f f e c t i v e n e s s
I b e lie v e

is s u e

o f d is c lo s u r e ,

o f m on eta ry p o l i c y
of

a s u b s ta n tia l d egree o f

th e c e n tr a l

d e c is io n -m a k in g ,

t h e FOMC d e l i b e r a t i v e
c o n fid e n t ia lity

p rocess.

n ecessa ry to

en su re th e

e ffe c tiv e n e s s

o f th is

v ie w t h a t ,

on t h e w h o le ,

t h e c u r r e n t p r o c e s s w o r k s w e l l an d

p rop osed

s u b s ta n tia l

w o u ld t h r e a t e n
th e r e fo r e
p u b lic

th e q u a lity

su ch p r o p o s e d

of

c o n fid e n tia l
t im e .

have o b serv ed
engaged

in

p la n s t o

It

is

my

FOMC d e l i b e r a t i o n s
d e c is io n s ,

i n my v i e w ,

th e

in fo r m a tio n

in

an d

serve

th e

of

I

a fte r
of

as w e ll.

or

a p p r o x im a t e ly

som e o f my p e r s o n a l

i n my l o c k e d

file s .

I

o c c a s io n a lly

As I b e lie v e

C h a irm a n G r e e n s p a n
d o r e ta in

n o t e s and ro u g h t r a n s c r i p t s

som e

fo r use

in

FOMC m i n u t e s .

in t e n t io n a l

q u e s tio n ,
le a k in g

th e p u b lic ,

7 3 -2 0 8 0 - 9 4 - 5




n otes

n ote

s u b s e q u e n t l y k e p t i n my

am a w a r e t h a t FOMC s t a f f

you r th ir d

th e p re s s

keep e d ite d

in y ou r

I d o o c c a s io n a lly

an d a r e d e s t r o y e d

t h e FOMC m e e t i n g s

th ou g h e d i t e d ,

As f o r

re q u e s te d

d u r i n g FOMC m e e t i n g s

file s

n o te -ta k in g

p r e p a r a tio n

or

oth er

o t h e r s p r e s e n t a t FOMC m e e t i n g s

d is c u s s ,

d e ta ile d ,

to

c h a n g e s w o u ld n o t ,

I a ls o

in te r v e n tio n s

w illfu l

of

o f m o n e ta ry p o l i c y

sum m ary o b s e r v a t i o n s w h ic h a r e

o n e y e a r 's
oral

to

in v it a t io n ,

v e ry rou gh
lo c k e d

d is c lo s u r e

p rocess.

in t e r e s t.

W it h r e s p e c t
le t te r

ch an ges in

d e lib e r a tiv e

is

w h ic h

I d o n o t k now o f a n y c a s e o f

o f c o n fid e n tia l

a lth o u g h

I

FOMC i n f o r m a t i o n

am a w a r e t h a t t h e r e h a s

126
5

b e e n c o n f i d e n t i a l c o m m u n ic a tio n w it h a p p r o p r i a t e s e n i o r
a d m in is t r a t io n
a v o id r e l e a s e

o ffic ia ls .
of

le a k e d s t o r i e s
in fe r e n c e s .

c o n fid e n tia l

of

it

is

in v o lv e d a r e v e r y c a r e fu l t o

in fo r m a tio n ,

may h a v e r e s u l t e d

I n my v i e w ,

c o n fid e n tia lity

W h ile a l l

fr o m

is

p o s s ib le

in a d v e r te n c e o r

th a t

s k illfu l

im p e r a t iv e t h a t we e n s u r e t h e

FOMC i n f o r m a t i o n ,

and I can a s s u r e th e

C o m m it te e t h a t w e a r e m a k in g e v e r y e f f o r t




it

to

do so.

127

STATEMENT PREPARED FOR THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
HEARINGS OF OCTOBER 19, 1993
WILLIAM J. MCDONOUGH
PRESIDENT, FEDERAL RESERVE BANK OF NEW YORK




128
Mr. Chairman, you invited me to appear before the Committee to
present my independent views regarding the accounting of FOMC meetings.
As you know, it is not possible for me to appear at the hearings, but I
submit herewith my views, as well as the answers to three questions to me in
your letter of September 20.
I

believe that the primary responsibility of the Federal Open Market

Committee is to develop and carry out a monetary policy which contributes
to sustained economic growth with price stability. Therefore, I address
myself to the question before us guided essentially by whether the present
accounting of the FOMC meetings is more or less supportive of that
responsibility than would be the case under the provisions proposed in the
legislation being considered, H.R. 28.
In addition to serving as President of the Federal Reserve Bank of
New York and Vice Chairman of the FOMC, I also bring to this
consideration a period as Manager of the Federal Reserve System Open
Market Account with responsibility for the day-to-day execution of FOMC
decisions. In the hope of adding some specialized value to the Committee’s
consideration, I will direct my consideration to the market effect of one




129
2

aspect of H.R. 28, release of the policy decision of the FOMC within seven
days as compared with the release of the directive the Friday after the
subsequent meeting, i.e., with a delay of about seven weeks.
We all may have differing views either in general or from time to time
regarding the right direction of monetary policy. But whatever these views,
the actual carrying out of monetary policy in the best interest of the
American people must involve flexibility. Why?
It is frequently the case that the right monetary policy conclusion is
not an immediate change in policy. On occasion, the FOMC decides that
there should be a "tilt” between meetings towards a shift in monetary policy;
that "tilt" may or may not result in an actual policy change, depending on
how circumstances in the economy and in financial markets play out. The
present policy of releasing the minutes and the directive after the following
meeting permits this flexibility, since by the time of release under the
present policy it is a clear fact whether policy has been changed or not.
A person who has not spent much of his or her life in these markets
may say that nothing would be lost by immediate disclosure. That is simply
not so. I can assure the Committee, based on over two decades of private
sector experience in financial markets, that the disclosure of an FOMC




130
3
policy tilt would be translated by the financial markets in moments after the
release to an execution of the policy shift. A policy change which the
FOMC thought might make sense only if certain economic circumstances
evolve would become an executed policy as market participants acted
instantly to either profit or avoid loss. In other words, market participants
would immediately assume that the policy tilt would become reality and
protect themselves by immediately moving market rates accordingly. With
that being the case, the FOMC would be deprived of the inter-meeting
flexibility which I believe is essential for carrying out the optimum monetary
policy. The Committee would be convinced that it could not choose a tilt,
even if it thought a tilt was the right decision. The FOMC would be left
with only the binary choice of maintaining present policy or changing it
immediately. Monetary policy is simply too important to the good of the
American people to force it into that kind of arbitrary and inappropriate
straightjacket. The greater good of the best monetary policy which the
FOMC can devise and carry out must be given priority over a great, but
lesser, good of immediately informing the public.
Mr. Chairman, you asked that I also respond to three specific
questions included in your letter to me of September 20. I provide these




131
4

answers as follows:
First, I have made no notes or records of the FOMC meetings I have
attended.
Second, an officer of the Open Market Function at the New York Fed
attends the FOMC meetings to provide backup for the Manager for
Domestic Operations, That officer prepares informal written notes during
the meeting which are not intended to be a record of events, but rather a
guide to the Open Market officers in the day-to-day management of the
account between meetings. These notes are given very limited distribution
within the New York Fed: to the President, the First Vice President, the
General Counsel and the other system account officers, a total of about
seven people. Recipients return the notes to the officer who has prepared
them and they are immediately destroyed. No file is maintained.
The Research Director of the New York Fed is my principal advisor
on monetary policy matters. He attends the FOMC meetings and keeps
handwritten notes; these notes are not transcribed and are kept in the
Research Director’s own files, not those of the Research Group.
I have no personal knowledge of any other notes or records that
others may have made at FOMC meetings or the release of FOMC meeting




132
5

information prior to the official release of that information.
As President of the Federal Reserve Bank of New York, I appreciate
this opportunity to address myself to the Committee. The Federal Reserve
was created by the Congress and we are accountable to the American
people through the Congress as the people’s elected representatives. I hope
that these comments are helpful to you in your deliberations.




######

133
F o r U se a t 1 0 :0 0
T u esday,
O c t o b e r 1 9 , 19 93

a .m .

EDT

T e s tim o n y by

R ob ert T.

P re s id e n t

P arry

an d C h i e f E x e c u t i v e O f f i c e r

F e d e r a l R e s e r v e Bank o f

b e fo re

C o m m it te e o n B a n k in g ,




U .S .

S an F r a n c i s c o

th e

F i n a n c e a n d U rb a n A f f a i r s

H o u se o f R e p r e s e n t a t i v e s

. O cto b e r

19,

1993

134
As P r e s id e n t o f th e
one o f

my j o b s

d e lib e r a tio n s
T w e lfth
up o f

is

to

w it h

F e d e r a l R e s e r v e B ank o f

c o n tr ib u te

in fo r m a tio n

to

and id e a s

F ed era l R eserve D is t r ic t

th e

n in e w e s te r n

t h e m ore r o b u s t

sta te

sta tes,
e c o n o m ie s

is

fr o m my D i s t r i c t .

h ig h ly d iv e r s e :

w h ic h a t p r e s e n t
in

S an F r a n c i s c o ,

F ederal R eserve p o lic y

th e co u n try

is

in c lu d e
(U t a h ,

N e v a d a ), and on e o f t h e w e a k e s t— C a l i f o r n i a .

In

h a s s e e n e m p lo y m e n t f a l l

(4 .7

b y 592 t h o u s a n d j o b s

it

The
m ade

th ree

of

I d a h o an d

fa c t,

C a lifo r n ia

p ercen t)

s in c e

m id -1 9 9 0 .
W it h t h a t
a p p r e c ia tio n
d is c lo s u r e
(FOMC)

in tr o d u c tio n ,

fo r

of

t h is

th is
in

th ere

v ie w

th e

in

case

e x is ts .

is

I b e lie v e

th a t th e re

to

not to

im p o r ta n c e o f t h e d e c i s i o n s

to

en su re th e e ffe c t iv e n e s s

p rocess.

In

order to

is

id e a s

do s o .

of

(I

be a fr e e

expressed

1 9 9 3 .)

H ow ever,

reason

b e in g m ade,

it

flo w

of

p o lic y

d e c is io n s ,

in fo r m a tio n

and

a t e a c h m e e tin g .
Some o f

th e

in fo r m a tio n

in h e r e n tly

c o n fid e n tia l

in d iv id u a l

fir m s

c o n fid e n tia lity ,

—

d is c u s s e d

fo r

e x a m p le ,

at

FOMC m e e t i n g s

becau se

it

is

p e r ta in s t o

an d w as o b t a i n e d u n d e r a p r o m i s e o f
or




in

som e i n s t a n c e s ,

1

is

th e d e c is io n -m a k in g

re a ch th e b e s t p o s s ib le

im p o r ta n t t h a t t h e r e

d is c lo s e d ,

su ch a c o m p e llin g

e s s e n tia l

it

b e a p r e s u m p t io n

you d a te d J a n u a ry 1 3 ,

FOMC d e l i b e r a t i o n s ,

G iv e n t h e

s h o u ld

s h o u ld b e f u l l y

a c o m p e llin g r e a so n

my l e t t e r
of

e x p r e s s my

a b o u t F e d e r a l O pen M a r k e t C o m m it te e

th a t F ed era l R eserve d e lib e r a tio n s
u n le s s

to

o p p o r t u n i t y t o d i s c u s s my v i e w s o n t h e

in fo r m a t io n

m e e tin g s .

I w o u ld l i k e

becau se

it

p e r ta in s

to

135
c o n f i d e n t i a l m a tte rs
record s

of

w o u ld b e
It

brou gh t
is

th e ir

d is c u s s io n .
som e i d e a s

ta k en

in to

id e a s

in

th e co n te x t o f

v e r y n a tu re o f

th e

m e e tin g s o r

t h a t v e r b a tim

fr e e

of

of

co n te x t,
c o lle c tiv e
record s

our p o lic y

I have c o n s id e r e d
m in u t e s w it h

w as d o n e u n t i l

FOMC f e e l

in

th e

fiv e

years— a fte r

o b je c t io n s

w o u ld b e a s s u a g e d .
s tu d y in g

th a t

su ch

be g u a ra n teed .

U .S .

If

tr a n s c r ip t

c o u ld

I m ig h t a l s o

it




a

m is in te r p r e te d
d is c u s s io n s
I am

in h ib it

th e

p rocess,

lim it

to

d e t a ile d

non­

a fte r

a lo n g d e la y ,

w ere p o s s i b l e
fo r

to

as

en su re th a t

an e x t e n d e d

p e r io d

of

m any o f my

S u c h r e c o r d s m ig h t h a v e v a l u e t o

in th e

r e le a s e

H ow ever,
of

I

am

in fo r m a tio n

o f an e a r l y

ham per t h e d e l i b e r a t i v e

w o u ld

r e a c h in g

th e

a m e e tin g w ere h e l d ,

r e le a s e

c o u ld
of

a

p rocess

at

FOMC

add t h a t t h e p r e p a r a t io n

of

su ch d e t a ile d

m in u t e s w o u ld b e v e r y b u r d e n s o m e ,
b e n e fits

r e tu r n in g

r e v e a le d

E v en t h e p o s s i b i l i t y

m e e tin g s .

of

d is c u s s io n s .

m o n eta ry p o l i c y .

a d e la y

d is c u s s io n ,

p rocess

an d i n

to

flo w in g

o r v i d e o t a p e s w o u ld

a ttr ib u tio n

t h e m id -1 9 7 0 s .

fr e e

i n s t i t u t i o n a l m e m o r ie s .

th e m e r its o f

t im e — s a y ,

research ers

o r v e r b a tim

in fo r m a tio n th a t

w h ic h may i n c l u d e

s u c h m i n u t e s w o u ld n o t b e m ade p u b l i c

s o c ia l

a fr e e ly

co m m e n ts a t o u r m e e t i n g s ,

e ffe c tiv e n e s s

s k e p tic a l

th e

any p r o d u c t i v e

o r m o d ifie d

fu ll

con cern ed

v e r b a tim

lim it

Y e t s u c h co m m e n ts c o u l d b e s e r i o u s l y

a t p r e v io u s

th e

V id e o t a p e s

th e d e cis io n -m a k in g p r o c e s s .

a re d is c a r d e d

out o f

flo w

c o u n tr ie s .

i m p o r t a n t t h a t m em bers o f t h e

By t h e

con sen su s.
if

o th er

o u r m e e t i n g s w o u ld s e v e r e l y

a ls o

ad van ce

in

ju s t ify

an d I am n o t

th e c o s t s .

2

c o n v in c e d

t h a t th e

136
A ls o ,
c u r r e n t ly

I b e lie v e

t h a t t h e M in u t e s o f

a r e m ade a v a i l a b l e

d is tilla tio n

of

a ll

p r o v id e

FOMC m e e t i n g s t h a t

an a c c u r a t e

and th o r o u g h

t h e co m m e n ts m ade b y me an d my FOMC

c o lle a g u e s ,

w h il e a v o id in g t h e p r o b le m s a s s o c i a t e d

a ttr ib u tio n

or

a c c u r a te ly
d e c is io n s
w e ll

as

a v e r b a tim

r e fle c ts
by c l e a r l y

con tra ry

t h e ir

M in u t e s .
p e r io d

th e

In y o u r
fo r

m ade i n

in

d e c is io n

id e n tifie d

e x p e c ta tio n s

s u b s e q u e n t m e e tin g ,

le tte r

c o n n e c t io n w ith
I have o f

I

do ta k e

co m m e n ts I p l a n
R eserve D is t r ic t
o c c a s io n a lly
p a r tic u la r
file s
w it h

th e

as

C o m m it te e

b y nam e i n
o f p o lic y

FOMC m e e t i n g s

is

th e

over

th e

r e le a s e d

a

s e s s io n ,

or record s

th a t

I have a tte n d e d ,

you

I have
and an y

n o t e s t h a t o t h e r s h a v e m ad e.

in to

s a id

a t FOMC m e e t i n g s .

t h e m e e tin g s n o t e s

e c o n o m ie s ,

c o n c e r n in g

a b o u t m o n eta ry p o l i c y ,

T h ese

t h a t a r e on t h e

"ta lk in g p o in t s 1 a re
'

F e d e r a l R e s e r v e Bank o f
p roced u res.

s o m e w h a t fr o m my n o t e s ,




a tten d t h is

n otes

abou t s p e c ia l t o p ic s

FOMC s e c u r i t y

d iv e r g e

of

p o lic y

M oreover,

t o m ake a b o u t t h e n a t i o n a l a n d T w e l f t h

m e e tin g .

a t th e

th e m a jo r it y ,

and n o r m a lly

r e q u e s t i n g me t o

I d o n o t t a k e n o t e s o f w hat i s
H ow ever,

to

t h a t s u b s e q u e n t m e e tin g .

in fo r m a t io n c o n c e r n in g

k n o w le d g e

le a d in g

th e d is c u s s io n .

fin a l

T he d ocu m en t c o v e r s

u n til

t h e v ie w s o f

an d a r e

d ir e c t

The c u r r e n t d o cu m e n t

an d d i s c u s s i o n s

r a is e d

fr o m t h e

r e a s o n in g ,

fe w d a y s a f t e r

ask ed

is s u e s

d e s c r ib in g

p o in ts

m em bers w h o d i s s e n t
e x p la in

th e

record .

w it h

F ederal

and
agen da f o r

stored

S an F r a n c i s c o

th e

in

in

lo c k e d

a ccord an ce

My a c t u a l s t a t e m e n t s o f t e n
a n d I a l s o m ake im p r o m p tu

3

a

137
co m m e n ts a t
in to

e a ch m e e tin g ,

FOMC m e e t i n g s

of

in

o c c a s io n a lly

d is c u s s io n s

in

th e T w e lfth

and a n a l y s i s

of

of

I have no n o t e s .

book p rep ared

T h is b o o k

d e v e lo p m e n ts

d e v e lo p m e n ts

is s u e s ,

w h ic h

a b r ie fin g

D e p a rtm e n t a t t h e B an k.
fo r e c a s ts

fo r

by th e

c o n ta in s

t h e U .S .

ta k e

R esearch

a n a ly s is

econ om y,

I a ls o

an d

a n a ly s is

of

F ed eral R eserve D is t r ic t ,
s p e c ia l

t o p ic s

m on eta ry p o l i c y

r e la te d

is s u e s

to

FOMC

and

r e c o m m e n d a t io n s b y my s t a f f .
The D i r e c t o r

of

R esearch a t th e

an d o c c a s i o n a l l y

h is

co m m e n ts m ade a t

FOMC m e e t i n g s w hen t h e y

T hese n o te s
a n a ly s is
th e ir
in

are

w ith in

lo c k e d

fo r

a c c o r d a n c e w ith

c o n fid e n tia l
in fo r m a tio n
d a te,

and

th e ir

w ith

a t th e

d ir e c tin g

FOMC s e c u r i t y
resp ect to

u n a u th o r iz e d

n otes

Bank,

of

a s my a d v i s o r .
FOMC p o l i c y

T hey a r e

F e d e r a l R e s e r v e B ank o f

stored

in

S an F r a n c i s c o

p roced u res.

y o u r q u e s tio n

about

"le a k s ”

I have n ev er d iv u lg e d

p erson s p r io r

I h ave no in fo r m a tio n




in

a tte n d

D e p a rtm e n t.

FOMC i n f o r m a t i o n ,
to

ta k e h a n d -w r itte n

own u s e

th e R esearch

file s

F in a lly ,

a lte r n a te ,

S an F r a n c i s c o R e s e r v e

c o n c e r n in g

to

th e

of

a n y FOMC

o ffic ia l

anyone e ls e

r e le a s e

d o in g

so.

138
FOR R E LEASE ON DELI V E R Y
10:00 A.M. EDT
OCTOBER 19, 1993

Statement by-

Wayne D. An g e l l

Member.

Board of Governors of the Federal R e s e r v e S y s t e m

before the

Committee on Banking,




U.S.

Finance and U r b a n A f f airs

Hou s e of R e p r e s e n t a t i v e s

October

19,

1993

139
Mr.

Chairman

and m e mbers

o p portunity to give y o u m y views
policy.

As

perspective

I have

indicated

of the Committee,

I a p p r e c i a t e this

on the a c c o u n t a b i l i t y of m o n e t a r y

p r e viously in co r r e s p o n d e n c e w i t h you,

is of one who throug h o u t his career as an elected

appointed official has bee n in favor of openi n g g o v ernment
to the public

and the press.

extent possible to ensure that the process
f o rmulation is app r o p r i a t e and equitable:

to the

of publ i c

adopt the ve r y best policies.

I b e l i e v e the current

greatest

policy

it also d e m a n d s that
In some cases,

there is a t r a d e - o f f b e t w e e n these two objectives.
will explain,

procee d i n g s

Our democracy demands that the actions

of its government be c o n d u c t e d "in the sunshine"

government agencies

my

and

As m y stat e m e n t

legislati v e r e q u i r e m e n t s for

m o n e t a r y policy a c c o u n t a b i l i t y and the Federa l R e s e r v e ' s current
policies

regarding the provi s i o n of m o n e t a r y p o l i c y i n f o r m a t i o n strike

a reasonable b a l ance b e t w e e n these objectives.
M o n e t a r y po l i c y is best formulated w i t h i n a f r a m e w o r k that
p rovides

an app ro p r i a t e de g r e e of i n s ulation f r o m d a y - t o - d a y political

pressures whi l e

r e q uiring full accountability.

Federal R e s erve

some insulation,

terms

for m e m b e r s

for example,

of the B o ard of Governors

budget of the F ederal R e s e r v e

T he C ongress

gave the

by e s t a b l i s h i n g long

and b y e x e m p t i n g the

System f r o m Co n g r e s s i o n a l

appr o p r i a t i o n s

of f u n d s .
But at the same time,

the Congress has p r o v i d e d for full

a c c o u n t a b i l i t y of m o n e t a r y policy.

As yo u know,

t h e B o a r d of

Governors is required to report to the Congress on its m o n e t a r y pol i c y
plans

and obj e c t i v e s t w i c e each year.

In hea r i n g s b e f o r e this

Committee and the c o r r e s p o n d i n g bod y in the Senate,

the C h a i r m a n of

the B o ard presents t e s t i m o n y on the m o n e t a r y p o l i c y report and
responds fully to your




questions

on m o n e t a r y policy.

Federal Reserve

140
-

2-

p o l i c y m a k e r s also t e s t i f y as requested before this and other
C o n gressional Committees
interest,

about m o n e t a r y p o licy and other m a t t e r s of

inc l u d i n g a detailed
B e yond the s t a tutory

provides
conduct

significant

ac c o u n t i n g of our expenditures.
requirements,

the Federal R e s e r v e

additional i n f o r m a t i o n to t he public about the

of m o n e t a r y policy.

In particular,

the Federal Open M a r k e t

C o m mittee p u blishe s m i n u t e s of each of its meetings.

These m i n u t e s

summarize fully the di s c u s s i o n and indi c a t e the a t t e n d a n c e at the
meetings.

They show the results of all recorded votes,

s t atements that
by the FOMC

explain d i s s e n t i n g votes.

Signi f i c a n t

including
d e c i sions t a k e n

should always be made on the basis of r e c orded v o t e s * - i n

a ccord wit h an important pri n c i p l e of accountabi l i t y .

Each m e m b e r

of

the Com m i t t e e is a f forded an oppor t u n i t y to part i c i p a t e in the
p r e p a r a t i o n of the m i n u t e s
omitted.

In m y view,

so that no individual

or shared v iews

the minu t e s pres e n t an acc u r a t e account

are

of each

FOMC meeting.
W i t h regard to th e ti m e l i n e s s

of the

release of such minutes,

as yo u k n o w the y are pub l i s h e d s h ortly after the f o l l o w i n g Com m i t t e e
meeting.

It seems to me that such a lag is appropriate.

i m m ediate r e l ease of in f o r m a t i o n on the Committe e ' s
c on tingencies could increase mark e t volatility,

plans for

p a r t i c u l a r l y in

c i rcumstances whe n the conti n g e n c i e s do not eventuate.
v o l a t i l i t y is unnecessary,
if concerns

The

Such

and could be e s p e c i a l l y c o u n t e r p r o d u c t i v e

about p o ssible v o l a t i l i t y dete r r e d some m e m b e r s

of the

Federal O p e n M a r k e t Commi t t e e from d i s c u s s i n g suc h c o n t i n g e n c i e s or
drove t h e m to r e l ying on implicit or b e h i n d - t h e - s c e n e s unders t a n d i n g s .
On balance,

the ma r k e t and the public

are better

s e rved by m o r e d e t a i l

and m o r e openness w i t h d e layed p u b l i c a t i o n as co m p a r e d w i t h the




141
-3-

realistic alternative of less s p e c i f i c i t y that w o u l d l i k e l y a c c o m p a n y
e a r lier publication.
Similarly,

I believe that p r ovisio n s in the F e d e r a l Reserve

System Accountability Act

(H.R.

videot a p e s or transcripts

of Commi t t e e m e e t i n g s w o u l d hav e delete r i o u s

consequences.

In any setting,

28)

that wo u l d

require

release of

t h e recog n i t i o n that o n e ’s remarks will

be reported verb a t i m will dampen p a r t i c i p a t i o n of m o s t m e m b e r s
discussion.

In the context of m o n e t a r y policy,

in the

such p r o v i s i o n s

likely

would cause man y policymakers to be m u c h less w i l l i n g to c o n j e c t u r e
about future economic and financial developm e n t s ,
a lternative policies,
conditions,

or to c h allenge

discussions during FOMC m e e t i n g s

to appropriate policy decisions.

to e x p l o r e

o t h e r s ’ views.

Under those

are less l i k e l y to lead

The w i l l i n g n e s s of i n d i v i d u a l

m e m b e r s to explore verbally what m a y

seem to be l o w p r o b a b i l i t y events

m a y be the b e ginning of a ne w pe r s p e c t i v e that elic i t s m ore c a reful
w a t c h i n g and continued debate.

The process

of d e v e l o p i n g a consensus

vie w through an open contrarian f o r u m is e s s e n t i a l

if m o n e t a r y policy

is to lead toward monetary stability.
For these
H.R.

reasons,

I b e l i e v e that t h e relevant p r o v i s i o n s

of

28 would do little to make the m o n e t a r y p o l i c y process m o r e

transparent and,

unfortunately,

m o n e t a r y policy less effective.

w o u l d do m u c h to m a k e the con d u c t
In m y view,

r egar d i n g disclosure are on the right track:
r evi e w of alternative policies w h i l e

of

our current p r o c e d u r e s
T h e y permit a c a reful

a l l o w i n g the C ongress and the

public to analyze both the p r o cess by w h i c h our deci s i o n s

a re reached

and their results.
In addition to soli c i t i n g m y comme n t s
of mone t a r y policy,

you also asked about notes

on the a c c o u n t a b i l i t y
or records r e g a r d i n g

FOMC meetings and about p r e mature release of i n f o r m a t i o n p e r t a i n i n g to




142
-4 -

the discus s i o n at such meetings.

It has been my p r a ctice to take

sketchy notes du r i n g the course of FOMC meetings; the n otes
solely for my own use,
Federal Reserve.

are kept,

in a locked file cabinet in m y o f f i c e at the

Others m a y also take notes, but I h a v e no

i n f ormation

regarding the location and disposition,

others will

answer your question themselves.

aware of the e x istence

and

Some yea r s

I assume the
ago I became

of rough transcripts of the m e e t i n g s w h e n I was

w r i t i n g a d i s s e n t i n g statement.
ava ilable to me a t r a n s c r i p t
fro m the previous meeting.

The secretary of the FOM C m a d e

of m y statements,

and only my statements,

With regard to premature d i s c l o s u r e of

c o n fidential FOMC information,

over the years I have bee n t r o u b l e d by

t he appearance in the press of information that serves to give
c redence to c o n jecture and t h e r e b y damages Federal R e s e r v e
credibility,

I have no kn o w l e d g e as to the source of such

information.
Thank y o u again for the opportunity to t e s t i f y on this
i m portant

subject.




143
For Release On Delivery
10:00 A.M., EDT
October 19, 1993

Statement
by
Edvard W. Kelley, Jr.
Member
Board of Governors of the Federal Reserve System
Before
The Committee on Banking, Finance and Urban Affairs




U.S. House of Representatives

Washington, D .C .
October 19, 1993

144

Thank you for an opportunity to present my views on HR 28,
the "Federal Reserve System Accountability Act of 1993". Pursuant
to the request in the Chairman’s letter of invitation, I shall first
answer, in order, the three specific questions posed therein and then
offer my perspectives on the bill in the area of maintaining a record
of the Federal Open Market Committee (FOMC) meetings.
Question 1: I have generated rough pencil notes of my own
thoughts, and summaries of the views of other members as I under­
stood them, at most meetings. These notes reside in a locked file
in my office.
Question 2: I would assume that various persons present at
the meetings prepare and keep notes and records of their own,
including the FOMC secretariat, but I am unaware of specifically
who does what in this regard. Doubtless others will report on their
own activities.
Question 3:

I have no information whatsoever about

unauthorized or premature release of FOMC information.
Let me move on to comment on HR 28 which would require,
among other things,

complete release of FOMC meeting

proceedings within sixty days. I must oppose this proposal.




145

-

2-

It seems to me that the issue here is the reconciliation of two
basic principles for conducting public business in a democracy. The
first is the obvious requirement that public policy be generated to
further the public interest in the soundest possible way. The second
is that the public has the right to know what its leaders are doing in
the conduct of its business, including how and why they are doing
it. While these two principles can often be fully accommodated,
there are clearly cases wherein the second, fully implemented, can
potentially degrade the first.

In such cases, the overriding

requirement is that public policy must be of the highest possible
quality.
The meetings of the FOMC are such a case.

In these

meetings twelve voting members augmented by the seven additional
Reserve Bank Presidents debate and decide important public
matters of monetary policy. To work well such an arrangement
must proceed in private, where the participants may freely and
easily exchange perspectives and confidential information, dispute,
alter viewpoints, and work toward discovery of common ground.
In this manner, responsible public policy is created. To expose this
process to public scrutiny would, in my view, very clearly introduce




146
-3 -

an atmosphere that would be detrimental to the final result. The
quality of the final result, sound monetary policy to undergird and
support our economy, is the most important of the interests in
question.

I believe HR 28 would be counterproductive in this

respect.
The requirement remains that the public be as informed as
possible in these matters and that those involved in the process be
accountable. I believe that the existing procedures for release of
FOMC decisions are responsive to the public’s right to be informed.
Concerning accountability, FOMC decisions are the result of the
votes of the participating members and each participant’s vote is
recorded and made public. Affirmative votes are explained in the
minutes as released, and dissenting votes are accompanied by
individual explanations. Thus, there is complete accountability for
results.
In summary, I feel that the public’s interest in this matter is
best served by maintaining a system wherein the process is
confidential and the policy results are made public in appropriate
ways, with personal and group accountability for such results.




147
FOR RELEASE ON DELIVERY
1 0 : 0 0 A .M . EDT
OCTOBER 1 9 , 1 9 9 3

S ta te m e n t by

John P .

M em b er,

L aW are

B oard o f G o v ern ors o f

b e fo re

C o m m it te e o n B a n k in g ,




U .S .

th e F ed era l R eserve

S y ste m

th e

F in a n c e an d U rban A f f a i r s

H o u se o f

O cto b e r

R e p r e s e n ta tiv e s

19,

1993

148
M r.

C h a ir m a n a n d M e m b e rs o f t h e C o m m it te e —
I

to

am h e r e w i t h my F e d e r a l O pen M a r k e t C o m m it te e c o l l e a g u e s

com m ent o n t h e

d e s ig n e d

to

im p r o v e t h e

C o m m it t e e f o r

I
p a st,

of

it

p resen ted

fo r

its

tw ic e

m oves,

expressed

p erh a p s th e

fu lle s t

by any c e n t r a l
I

bank

p r o v id e s

d e lib e r a tio n s

s c r u tin iz e d

a ra th er

term s p r e s c r ib e d

p u b lic

a c c o u n tin g

in

by th e

d o n 't

A v e r b a tim
m e e tin g s

of

th e

t h e m e m b e rs fr o m

th e

of

see

o f m on eta ry p o l i c y

c h a r a c te r iz e s

le s s

no p u rpose t o

pu rpose

b e lie v e
or

is

b e g a in e d

p ro v id e d

by p u b lic a t io n

in

a v id e o ta p e

record

on t h e

have p a r t i c u l a r l y h ig h
a v id e o ta p e r e c o r d in g

fr e e

exch an ge o f
We a r e ,

of

th e

fo r

flo o r

o f th e

r a tin g s .
of

th e

O p en M a r k e t C o m m it te e m i g h t s i g n i f i c a n t l y

o u r m e e tin g s .




It

t h e F e d e r a l O pen M a r k e t C o m m i t t e e 's

tr a n s c r ip t

th e

of

o b je c t iv e s

w o r ld .

and e v e n

I

by

sta tu te.

w h ic h m ig h t p r o v i d e p r im e -t im e c o m p e t i t i o n

w h ic h

th e

on t h e

f u l l d e s c r ip tio n

C o n g r e s s i o n a l C o m m it t e e h e a r i n g s an d s p e e c h e s
H ou se,

in

and a n a ly z e d by

e c o n o m i c p e r f o r m a n c e an d f u t u r e
in

tr a n s c r ip t

p r o c e e d in g s ,

fo r

T h e m a n d a te d H u m p h re y -H a w k in s t e s t i m o n y ,

can h o n e s t ly

a v e r b a tim

as

r a t h e r th a n on th e p r o c e d u r e s

a y e a r and in t e n s e ly

h is to r ic

c o n tin u e ,

a p p r o p r ia te o v e r s ig h t e f f o r t s

d e te r m in e d .

p o lic y ,

you have ask ed

a f u l l anc^, t i m e l y

u r g e t h e C o m m itte e t o

C o n g r e s s an d t h e m e d ia ,
p o lic y

S p e c ific a lly ,

O pen M a r k e t

e a c h FOMC m e e t i n g .

co n ce n tra te

is

o f th e

r e q u ir e m e n t f o r

s u b s ta n c e o f m on eta ry p o l i c y
w h ic h

28 w h ic h a r e p u r p o r t e d l y

a c c o u n ta b ility

p rop osed

w o u ld s t r o n g l y
to

i n H .R .

m on eta ry p o l i c y .

com m e n t o n t h e
a c c o u n tin g

in it ia t iv e s

in h ib it

i d e a s w h ic h p r e s e n t l y
a fte r

a ll,

hu m an,

a n d we a l l

of

149
2
have a c e r ta in

am ou n t o f

s e lf-c o n s c io u s n e s s

s t a g e , * 1 a s w e w o u ld c e r t a i n l y

be under th e

a b o u t b e in g
su g g ested

"on

p r o to c o l.

T h i s p r o b l e m w o u ld b e h e i g h t e n e d b y t h e k n o w l e d g e t h a t t h e
m a tte rs u n der d is c u s s io n

a re h ig h ly

m a rk e ts h e r e and a rou n d t h e w o r ld .
g iv e s

t h e m em b ers o f

p r iv ile g e s
ju r ie s .

s e n s itiv e

C o n s u lta tio n

Im p o r ta n tly ,

it

a ls o

g iv e s th e

m ig h t d e l i b e r a t e

or

o r a v id e o cam era .

ju r y

d e c is io n s

"in

in

w o u ld b e s i g n i f i c a n t l y

ca m era 1
1

sam e

e x c h a n g e e n jo y e d

by

C o m m it t e e m em b ers t h e

c h a n g e t h e i r m in d s a s j u r o r s

i m a g i n e h ow j u r i e s
a ta p e re co rd e r

fin a n c ia l

t h e O p en M a r k e t C o m m it t e e t h e

o f o p e n c o m m u n ic a tio n a n d f r e e

sam e r i g h t t o

fo r

e n jo y .

I

c a n 't

th e p re se n ce o f
I

am s u r e

ch an ged.

th e p ro c e s s

o f d e v e lo p in g m on eta ry p o l i c y

a r e g im e o f

a s c r ib e

th e q u a lity
I

am e q u a l l y

su re

p u b lic p e rfo rm a n ce .

I

am m uch l e s s

d e c is io n s

w o u ld b e a d v e r s e l y

d is c u s s io n
in fo r m a t io n
d e la y e d

con cern ed

c a r e fu lly
p r o v id e d

s c h e d u le ,

d e s c r ib e d .

e d ite d

th a t th e q u a lity
a ffe c te d

to

d e le te

it

F in a lly ,
fo r

to

is s u e

o f th e

op en m arket o p e r a t io n s

m a rk e t know s a t

1 1 :3 0

or




t h e m e e tin g

is

be ex p ected ,

a lte r

tim e ly
a tr ic k y

th e

o n som e

it

fr o m

s h ift.

r e le a s e
one.

T h is

b u t I w o u ld n o t

in h ib it

cou rse

s o t h e m o r n in g a f t e r

w h e th e r t h e r e h a s b een a p o l i c y
im m e d ia t e ly d i s c e r n i b l e

and r e l e a s e d

s ig n ific a n t ly

o f t h e C o m m it te e o r
th e

b a s is

so m e b e h a v i o r a l c h a n g e o n t h e p a r t o f

w o u ld b e s u f f i c i e n t

d e lib e r a tio n s

p o lic y

m a r k e t-s e n s itiv e

p erh a p s on e y e a r a f t e r

O pen M a r k e t C o m m it te e m e m b e rs c o u l d
t h in k

of

u n der su ch

b y a m em orandum o f

on a c o n f i d e n t i a l

E v en t h e r e ,

w o u ld s u f f e r

of

of

of

p o lic y .

th e D ir e c tiv e

On t h e
th e
is

th e

one hand,

th e

FOMC m e e t i n g s

a lm o s t

t h e w ay t h e D e s k a t t h e New Y o r k

150
3
F e d e r a l R e s e r v e B an k e n t e r s
p e r s p e c tiv e ,
p u b lic a tio n
H .R .

28.

th ere
of

little

to

FOMC d e c i s i o n s

On t h e o t h e r h a n d ,

w o u ld p r o b a b l y
d ir e c tiv e ,
e ith e r

is

t h e m a rk e t.

d is c o u r a g e

So,

fr o m

th is

b e g a in e d o r

lo s t

fr o m

w it h in a w eek,

im p u ls iv e ly

on su ch

s p e c u la to r s .
a s y m m e tr ic

And,

tig h te n in g .

n ew s,

to

l a n g u a g e w o u ld

th e t i l t

th e d ir e c t iv e

of

in

th e

t h e C o m m it te e

M a r k e t s m i g h t i^ e a c t

n o o n e 's

in te r n a lly ,

of

a s y m m e t r ic l a n g u a g e

b e c a u s e asy m m etry r e f l e c t s

tow a rd e a s e o r

a s p rop osed under

im m e d ia t e r e l e a s e

th e use o f

th e

best

in te r e s t

su ch a s t r i c t u r e

i n h i b i t q u ic k

except

a g a in s t

in te r -m e e tin g

resp on se to

c h a n g in g m a rk et c o n d i t i o n s .
As to

th e th r e e

s p e c ific

q u e s tio n s

in y ou r

le tte r

of

in v ita tio n :
1.

I m ake n o n o t e s
b u lle t

p o in ts

coh eren ce.

a t FOMC m e e t i n g s o t h e r t h a n b r i e f

to

o u tlin e

T hese,

my own co m m e n ts t o

t o g e t h e r w ith a l l

a n a ly tic a l

m a te r ia ls

s u p p lie d

by th e s t a f f p r i o r t o

a r e g iv e n

b y me t o

my e x e c u t i v e

d e s tr u c tio n
2.

soon

as th e

FOMC m e e t i n g

of

sou rce

FOMC i n f o r m a t i o n .

ir r e s p o n s ib le
r e fle c t

lu r k

a n y w h e r e n e a r t h e FOMC.

of

If

a n a i v e t e w h ic h s h o u l d

b e p u n is h e d




a d jo u r n s .
m ade o r

to

th e

fu ll

th e

n o to r io u s

S u ch " l e a k s "

and r e p r e h e n s ib le .

th ey

s h o u ld

fo r

b y o t h e r m em bers o f t h e C o m m it t e e .

I h a v e n o k n o w le d g e o f t h e
"le a k s ”

th e m e e tin g ,

a s s is ta n t

I h a v e n o k n o w le d g e o f n o t e s o r r e c o r d s
r e ta in e d

3.

as

assu re

If

are

u n in te n t io n a l,
n o t be a llo w e d

in te n tio n a l,

th ey

e x t e n t o f w h a te v e r

to

151
4
r e m e d ie s a r e a v a i l a b l e ,

n o m a t t e r who t h e

c u lp r it

may

be.
I

a p p r e c ia te

and lo o k

th e o p p o r tu n ity t o

fo r w a r d t o

in

a n s w e r in g a n y f u r t h e r q u e s t i o n s

m ay h a v e .




p a r tic ip a te

#

th is
th e

h e a r in g
C o m m it t e e

152
F or r e le a s e on d e liv e r y
1 0 : 0 0 am, EDT
O c t o b e r 19 f 1 9 9 3

S ta te m e n t b y
L a w ren ce B . L in d s e y
M em b er,

B oard o f G o v ern ors o f

th e

b e fo re

th e

C o m m it t e e o n B a n k i n g ,

U .S .




H ou se o f

F e d e r a l R e s e r v e S y ste m

F i n a n c e a n d U rb a n A f f a i r s

R e p r e s e n ta tiv e s

O cto b e r 19,

1993

153
Mr. Chairman and members of the Committee, I appreciate this
opportunity to comment on provisions of the Federal Reserve
System Accountability Act (H.R. 28) that pertain to the release
of information on monetary policy.
The Federal Reserve currently provides a great deal of
information to the public about the monetary policymaking process
both formally and informally.

We report to the Congress

semiannually on our objectives and plans for monetary policy, and
we provide additional testimony on request.

We publish a

considerable volume of timely data on our monetary policy
actions.

In addition, we publish minutes of each FOMC meeting

shortly after the following meeting.

These minutes fully

summarize the discussion at Committee meetings and are reasonably
timely.

Federal Reserve officials frequently discuss the

economic situation and monetary policy in informal contacts with
members of the Congress, members of the Administration and their
staffs.

We publish numerous articles relating to monetary policy

in System publications.
Members of the Board and Presidents of Federal Reserve Banks
have an obligation to the public to explain their policy
positions, and we therefore often speak out through speeches and
other forums, not just on monetary policy but on economic policy
more generally.

We go out into communities across the nation,

partly to understand the economic circumstances and concerns of
all Americans, but also to articulate the Federal Reserve's
position on the economy.

For example, Mr. Chairman, I have

visited the fine city of San Antonio twice during my 23 months as




154
a Governor and have met with citizens from all walks of life to
listen to their needs and to explain our mission.

In fact, in

virtually every city to which I have travelled, over 30 in all
since becoming a Governor, I have met with local businesspeople,
bankers and citizens to discuss the economy and its direct impact
on their businesses and daily lives.

X consider the process of

carrying on a public dialogue to be central to my
responsibilities.
or thinking.

There are no mysteries regarding my position

And I believe the same is true of my colleagues.

In my view, the provisions of the proposed legislation
directed at increasing the availability of monetary policy
information probably would suffer from the law of unintended
consequences. Videotaping FOMC meetings would likely reduce the
usefulness of these meetings considerably.

Participants would

hesitate to use hypothetical or speculative examples to explain
points, because these examples could be misinterpreted and cause
unnecessary volatility in the financial markets.

Information

learned from meetings and travels is often proprietary in nature,
and thus could not be shared if the meetings were taped.

More

generally, the give and take in the discussion among policymakers
would be sharply reduced.

Policy discussions would tend to take

place outside of Committee meetings, and members of the Board and
Reserve Bank Presidents would come into meetings with
preconceived views to a much greater degree than is the case
currently.

Videotapes of these meetings might, in fact, consist

of nothing more than prepared speeches by the Board members and




2

155
Reserve Bank Presidents.
The ideas that arise in the current process of open, candid
discussion would no longer be produced at Committee meetings, and
thus would not be reported in FOMC minutes.

Their loss would

limit the flexibility and give and take of the policy process and
in so doing produce the unintended consequence of actually
reducing the net amount of publicly available informed debate on
monetary policy.
I am also skeptical that, on balance, immediate release of
the directive would be useful.

While there may be some

advantages, there are also costs.

Under current procedures,

market participants and others are able to recognize an actual
shift in the Federal Reserve's policy stance on the morning that
the change is implemented.

Thus, an immediate verbal statement

on policy changes would provide no additional information to the
market.

A requirement to publish information could be damaging

in cases where policy contingencies are part of the FOMC
directive.

In fact, increased market volatility could

potentially result due to market speculation.

Moreover, such a

requirement could diminish the Committee's ability to provide
instructions to the Federal Reserve Bank of New York to respond
to contingencies, potentially hobbling the Federal Reserve's
ability to resolve financial crises.
Let me turn next to the three specific questions that you
posed in your letter of invitation to this hearing.

First, I do

take very sketchy notes during FOMC meetings to help organize my




3

156
own comments.
meeting.

These notes are discarded by me after each

Second, I believe that others will be describing their

own note taking practices and that the Chairman will describe the
note taking process of the FOMC Secretariat.

Finally, I have no

information for the Committee on any premature release of FOMC
confidential material.
In summary, Mr. Chairman, I believe that there will always
be a tension between the benefits of an open and ongoing public
debate on economic policy and benefits of confidentiality.
Although the current system is imperfect, it is probably better
than resolving the current tension in favor of either fuller
openness or greater confidentiality.




157
F or r e le a s e on d e l i v e r y
1 0 :0 0 A .M . EDT
O c t o b e r 1 9 , 1993

T e s tim o n y b y

S u sa n M.

M em ber,

B oard o f G ov ern ors

P h illip s

of

th e

b e fo re

th e

C o m m it te e o n B a n k in g ,
U .S .

H o u se o f

F i n a n c e a n d U rb a n A f f a i r s
R e p r e s e n ta tiv e s

O cto b e r 19,

7 3 -2 0 8 0 - 9 4 - 6




F e d e r a l R e s e r v e S y s te m

19 9 3

158
I

am p l e a s e d

C o m m itte e

to

to

have

p resen t

th e

o p p o r tu n ity

my v i e w s

on

th e

to

appear

r e p o r tin g

t h is

F ederal

of

b e fo re

O pen

M a rk e t C o m m it te e a c t i o n s , w i t h s p e c i f i c r e f e r e n c e t o s e c t i o n s o f HR
28,

" F e d e r a l R e s e r v e S y s te m A c c o u n t a b i l i t y A c t o f

on m a in t a in in g
m em ber o f
m em ber o f

th e

a

th e

S in c e

record

B oard

of

of

th e

1993" th a t fo c u s

FOMC m e e t i n g s .

G overnors

I

am t h e

a n d am t h e r e f o r e

a ls o

n ew est

a v o tin g

FOMC.

jo in in g

th e

F ederal

R eserve

B oard,

I

have been

d e e p ly

im p r e s s e d b y t h e c a r e a n d a t t e n t i o n g i v e n t h r o u g h o u t t h e S y s te m t o
th e i n c o r p o r a t i o n o f a b r o a d r a n g e o f v i e w p o in t s i n t h e d e v e lo p m e n t
an d

con d u ct

of

m on eta ry

e c o n o m ic m o n i t o r in g i s
an d

c o n s u lta tiv e

B a n k s,

s tu d ie s

p o lic y .

T h is

in fo r m a t io n

g a th e r in g

d o n e t h r o u g h a v a r i e t y o f m ea n s - -

c o m m itte e s

r e q u ir in g

to

th e

B oard

s p e c ia liz e d

and

su rveys

a d v is o r y

in d iv id u a l
or

d a ta

or

R eserve

g a th e r in g ,

f i n a n c i a l r e p o r t s s u b m it t e d t o t h e B oa rd a s p a r t o f t h e r e g u l a t o r y
o v e r s ig h t

p rocess,

R eserve

B ank r e p o r t s

and

an d s t u d i e s u n d e r t a k e n a s b a c k g r o u n d f o r
FOMC d o c u m e n t s .
S y s te m

in

th is

a ttr ib u ta b le

T he c o o p e r a t i o n
en orm ou s

to

th e

c o n fid e n tia lity ,
tre a te d

by

th e

in

ta sk

of

s e r io u s
w h ic h

B oard

and

v a r io u s

by

e c o n o m ic

m o n ito r in g

m a n n e r,
and

R eserve

a n a ly s e s

th e B e ig e B ook and s t a f f

r e c e iv e d

b u s in e s s
th e

th e

and

th e

F ederal

in

som e

e c o n o m ic
B an ks.

is

R eserve
no

doubt

cases

in fo r m a t io n

T h is

th e
is

c o o p e r a tio n

d e m o n s t r a t e s c o n s i d e r a b l e c o n f i d e n c e i n t h e FOM C's p r o c e s s e s an d i s
lik e ly

b o ls t e r e d

stru ctu re

of

th e




by

th e

u n iq u e

q u a s i-p u b lic

F e d e r a l R e s e r v e S y ste m ,

c a r e fu lly

o r g a n iz a tio n a l
c ra fte d

159
2

-

by

th e

C on gress

b a la n c e s ,

w ith

to

The m anner i n
t h e m a rk e ts

c o n ta in

th e p r iv a t e
w h ic h

and th e
in

m em bers o f

FOMC i n

th e

th e

v a r io u s

econ om y.

th e

tren d s

in

The a b i l i t y

fin a n c ia l

U .S .

th e

nu m ber

B oard and th e

is

c r u c ia l

n a t i o n a l 's
g a t h e r in g
b oth

of

checks

an d

th e

not

cen tra l

FOMC c o m m u n ic a te w i t h
o n ly

m a i n t a in

bank b u t

s u ffic ie n t

real

to

a ls o

to

in fo r m a tio n

and f i n a n c i a l

tru st
a s s is t

to assess

secto rs

of

th e

t o r e c e i v e a n d r e l a y t o t h e FOMC c o n f i d e n t i a l

in fo r m a tio n

c o m p le x

in h e re n t

s e c t o r a n i n t e g r a l p a r t o f t h e S y s te m .

p u b lic

and c o n fid e n c e

an

-

is

v ita l

econ om y.

I

to

a

u n d e r s t a n d in g

th at

b e lie v e

fu ll

r e le a s in g

of

a

th e

lite r a l

t r a n s c r i p t i o n o r v i d e o t a p e o f t h e m e e t i n g s w o u ld s e r i o u s l y i n h i b i t
m em bers' a b i l i t i e s t o o b t a in and r e l a t e s u ch in f o r m a t io n b e c a u s e o f
its

p o t e n t i a l m ark et s e n s i t i v i t y .
A

v id e o ta p e

e ffe c ts

on

stru ctu re

th e
of

or

t r a n s c r ip t

n a tu re

th ose

of

a ls o

c o u ld

d is c u s s io n s

m e e tin g s

a llo w s

at

a ll

have
FOMC

B oard

oth er

h a r m fu l

m e e tin g s .

m em bers

p r e s id e n t s an o p p o r t u n it y t o p r e s e n t t h e i r v ie w s .

T he

and

B ank

T h e se v o t i n g and

n o n - v o t i n g m em bers com e f r o m v e r y d i v e r s e b a c k g r o u n d s , r e p r e s e n t i n g
d iffe r e n t

p a rts

of

th e

co u n try ,

and v a r y in g

p e r s p e c tiv e s

on

th e

m a c r o e c o n o m y an d t h e o p e r a t i o n o f m o n e t a r y p o l i c y .

T he p r o c e s s o f

e x p la in in g

d iffe r e n t

them

r e q u ir e s

s ig n ific a n t

e x p la n a t io n s and c o n s id e r a b le

and ta k e .

E ffo r ts

are

m ade

r e g io n a l
r e n d e rin g

by
or

m em bers
e c o n o m ic

th e

d iffic u lt.




v ie w p o in t s

If

use

to

com pare

and

and

o b s e r v a tio n s
of

a lite r a l

c o m p le te

r e c o n c ilin g
g iv e

con tra st

w ith

th ose

p rep ared

tra n s c r ip t

th e ir
of

oth er

sta te m e n ts

o r v id e o ta p e o f

p a r tic u la r
m em b ers,
e x tr e m e ly

FOMC m e e t in g s

160
- 3 w ere t o b e r e l e a s e d ,
to

speak

o n ly

a n a ly tic a l

in it ia l

in

a

red u ced

p o s itio n s .

now

t r u ly

may

sta te m e n ts,

used

in

to

lim it

reach
th e ir

The c u r r e n t a p p ro a ch t o
w h ic h

d is c u s s e d

and

c o n tr ib u te s

a llo w s
v ie w s

to

th is

r e fle c te d

e d it

th e d r a ft

in

th e

a p p r o p r ia te .

r e c o r d a tio n
w it h o u t

t h e m in u t e s b e f o r e

m in u t e s ,

an d

i n my p e r s o n a l

s u b je c t s

a ttr ib u tio n ,
A l l m em bers

th e n e x t m e e tin g .

make

e d ito r ia l
I

ta k e

s u g g e s t io n s

as

s p o r a d ic p e rs o n a l

to

r e m in d m y s e l f o f ,

T h ose h a n d w r itte n n o t e s a r e r e t a in e d

c o n fid e n tia l

o t h e r m em bers w i l l

file s ,

c ir c u la tio n

b u t in any c a s e i s
one

s h a r e d w ith n o o n e .

com m ent o n t h e i r

The p r e p a r a t i o n ,

who

th e p r e s s

E a r lie r

th e

e c o n o m i c c o n d i t i o n s n o t e d b y o t h e r m em bers a n d my own

on v a r io u s i s s u e s .

no

t h e ir

t o a s s u r e t h a t my own v i e w s a r e a d e q u a t e l y

t h e FOMC m e e t i n g s

of

of

p rocess.

th is p ro ce s s ,

know

m e m b e rs'

a d ju s t

s p e c ific

in

p u b lic o r

to

th ere

c o n s t r u c t i n g and r e l e a s i n g th e

of

som e t i m e ,

s in c e

th e

o t h e r 's

M oreover,

fle x ib ility

To a s s i s t

p o s itio n s

lo s in g
each

a con sen su s,

n o t e s d u r i n g som e p a r t s
f o r e x a m p le ,

upon

p rocess.

a n a ly tic a l d e lib e r a tiv e

h a v e an o p p o r t u n i t y t o
I r e v ie w

c o m p le te
p resen ted

c o n s t r a in e d

th ereb y

b u ild in g

d e lib e r a tiv e

c a p a b ility

s ta te m e n ts

m in u t e s ,

p rep ared

ap p roa ch

o b s e r v a tio n s
w o u ld b e

I b e l i e v e m any m em bers w o u ld f e e l

fr o m

r e le a s e

sh ares
p r io r
of

th e ir

its

s t a f f 's

n otes.

an d e d i t i n g o f t h e m i n u t e s t a k e s

c o m p le te b e f o r e

th is
to

own o r

I p re s u m e

in fo r m a tio n
o ffic ia l

th e m in u te s ,

th e n e x t m e e tin g .
w ith

I

m em bers

of

th e

r e le a s e

of

th e

r e le a s e .

or very

r a p id

C o m m i t t e e 's d e c i s i o n s a n d d i r e c t i v e s , w o u ld c u r t a i l t h e f l e x i b i l i t y
o f t h e C o m m i t t e e 's d e c i s i o n s .




T hose d i r e c t i v e s

fr e q u e n t ly c o n t a in

161
- 4

or

r e fe r e n c e

th o u g h

th e

lo n g e r -r u n
p r e c is e

s tr a te g ie s

fo r m

th ose

its e lf.

th e

C o m m itte e w is h e s

s tr a te g ie s

s u b s e q u e n t e c o n o m ic d e v e lo p m e n t s .
an n ou n ce i t s

-

w o u ld

ta k e

t o a d o p t,
depends

on

No m a jo r m a r k e t p a r t i c i p a n t c a n

f u t u r e s t r a t e g y w i t h o u t h a v in g a n i m p a c t on t h e m a r k e t

S u c h a n n o u n c e m e n ts w o u ld b e

F ederal

R e s e r v e 's

fle x ib ilitie s

w hen i t

w is h e s

s e lf

d e fe a tin g

X hope

th ese

d e lib e r a tio n s .
q u e s tio n s .




com m en ts
I

w o u ld

are

be

h e lp fu l

p le a s e d

to

to

to

th e

a ffe c t

th e

th e

do s o .

to

an d a b i l i t y

an d l i m i t

C o m m itte e

resp on d

to

m arket

in

its

a d d itio n a l

162
For release on delivery
10:00 a.m., EDT
October 19, 1993

Statement by

Edward G . Boehne
President, Federal Reserve Bank of Philadelphia

before the
Committee on Banking, Finance, and Urban Affairs




U.S. House of Representatives
October 19, 1993

163
I

am pleased to testify on the provisions of Section

4 of H.R. 28, the "Federal Reserve System Accountability
Act of 1993," that involve public disclosure of FOMC
meetings.
Let me begin by saying that I take very seriously my
role in FOMC proceedings and have a natural bias toward
public disclosure and personal accountability.

I also

take seriously the collective responsibility of the FOMC
to formulate the best possible monetary policy.

An

essential ingredient in formulating the best possible
monetary policy is an effective deliberative process —
one that

fosters

the

free

flow of

information,

the

ability to speculate about the effects of alternative
policies, the general give and take among members, and
the ability to reach a consensus.

The challenge is how

to maintain an effective deliberative process and still
achieve meaningful disclosure and accountability.

I

believe the FOMC's existing procedures provide a workable
balance between the need for a process that allows for
the formulation of an effective monetary policy and the
need for public disclosure and accountability.
Let me comment briefly on the specific provisions of
the bill.

I believe the FOMC already complies with the

provision of H.R. 28 that requires that a written copy of




164
2

the minutes of each FOMC meeting be made available to the
public within 60 days of the meeting.

The FOMC currently

releases minutes of its meetings six to eight weeks after
each

meeting,

proposed

which

consistent

period.

They

current

who

bill!s

regularly, these minutes are quite comprehensive.
about

those

the

them

information

For

with

read

include

60-day

is

and

prospective

economic and financial conditions, the pros and cons of
alternative

policy

actions,

the

reasons

a

majority

favored a particular action, plus comments, by name, of
those members dissenting.
The minutes the Committee now releases are not as
detailed

as

released

prior

Memorandum

the

had

Memorandum

to
some

1976.

of
But

Discussion
in

disadvantages

FOMC's deliberative process.

my
that

that

was

the

old

hindered

the

view

I attended FOMC meetings in

the early 1970s when the Memorandum was still being
prepared.

At those meetings, as I recall, members of the

Committee tended to stick to their prepared statements
and there was less give and take about alternative views
of the economy and policy options.

This occurred even

though the Memorandum was released only with a long lag
of five years.

I believe the current arrangement of

releasing the minutes of the FOMC meeting in summary form
but much more promptly than the Memorandum —




has

165
3
served the deliberative process well, while at the same
time providing relatively prompt public disclosure.
For

the

same

reasons,

I

believe

the

bill's

provisions to require a verbatim transcript or videotape
of each meeting would impede the FOMC's deliberative
process.

They would tend to lock members into prepared

statements and reduce the give and take of discussion.
Innovative proposals could easily be stifled.
would

be

proposing

less

willing

policy

to

play

alternatives,

devil's
and

Members

advocate

the

in

quality

of

monetary policy decision-making would suffer accordingly.
With

regard

to

the

bill's

proposal

for public

release of the directive or other FOMC decisions within
one week, I believe such a provision would not be very
helpful to the public.

The directive is best read along

with the minutes of the meeting.
currently
meeting.

released

together

Indeed, the two are

within

60

days

of

each

To release the directive earlier is likely to

confuse, rather than clarify, people's perceptions of the
stance of monetary policy because they will not have the
full

context

in

which

the

directive

was

prepared.

Consequently, I do not favor this provision of the bill.
Mr. Chairman, in your letter of invitation to appear
today, you also requested my comments on three other
areas.

Let me now turn to those.




First, during my

166
4
tenure as President of the Philadelphia Reserve Bank,
which began in 1981, I have not taken notes during FOMC
meetings.

My economic advisor usually takes handwritten

notes during meetings, which are then kept in a locked
file cabinet with other materials prepared for each FOMC
meeting.
should

He uses these notes to identify issues that
be

briefings.

investigated

for

future

pre-FOMC

economic

And finally, I am aware, of course, of news

stories that have discussed the premature release of
information about FOMC meetings.

I deplore such leaks.

Security of FOMC information is taken very seriously at
the Philadelphia Reserve Bank, and X do not have any
direct knowledge about how such leaks occurred.




167
For use at 10:00 a.m. EST
Tuesday
October 19, 1993

Testimony by
J. Alfred Broaddus, Jr.
President
Federal Reserve Bank of Richmond
before the
Committee on Banking, Finance and Urban Affairs




U. S. House of Representatives
October 19, 1993

168
l
I am pleased to be here today to discuss the procedures the Federal Open
Market Committee follows in recording policy information and releasing it to
the public.

My views in this area are based on two principles.

First, these

procedures should enable us to make the best possible monetary policy
decisions.

Second, in general we should release as much information to the

public on our policy decisions as promptly as possible, provided such release
does not compromise our ability to make sound decisions.
reflect substantial experience with the Committee.

My views also

Although I have been in my

present position only since the beginning of the year, I previously attended
committee meetings as an advisor over a period of approximately 20 years.
At each FOMC meeting, the Committee reviews current and prospective
economic conditions, discusses current policy issues, and then decides on an
appropriate policy direction.

This decision is communicated to the Trading

Desk at the Federal Reserve Bank of New York in a "directive" that instructs
the Desk to take actions in the money market that are consistent with the
desired policy direction.
document.

The directive is the Committee's primary policy

It contains the Committee's decision on whether to ease or tighten

reserve conditions or leave them unchanged immediately following the meeting.
It also signals, through the symmetry or asymmetry of some of its language,
the most likely direction of any prospective changes in policy during the
period up to the next meeting.
Currently, the directive for a particular FOMC meeting is released
immediately following the next meeting along with a "record of policy
actions.” This record provides a lengthy and thorough summary of the
discussion leading up to the Committee's policy decision.

It indicates in

considerable detail the views of those supporting the decision and contains a




169

2

full explanation of any dissenting votes.

It also lists by name the Committee

members voting for or against the policy decision.

As a long-time attendee at

FOMC meetings, I can attest that the record of policy actions always conveys
the content and flavor of the Committee's deliberations as well as its
specific decisions fully and accurately.

In my view, the record fully

satisfies the need for the Committee to be accountable to the public.
HR 28 would change these procedures in two ways.

First, it would

require that videotapes of FOMC meetings be made and released along with
verbatim transcripts within 60 days.

Second, it would require that Committee

decisions (i.e. the directive) be released within one week.

Let me comment on

each of these changes.
FOMC Policy Discussions.

My views on releasing videotapes and verbatim

transcripts of FOMC meetings have not changed since I responded to Chairman
Gonzalez on this issue earlier this year.

I believe that the prospect of a

literal record, even if it were released after a long period of time,
inevitably would introduce a self-consciousness into Committee proceedings
that would seriously inhibit the flow of information and ideas.

Members would

almost certainly be reluctant to speak and argue as freely and frankly as they
do now if they knew that their statements would be recorded and released
publicly.

In sum, I believe that releasing a literal record of Committee

meetings in any form would restrain Committee members in debate, undermine the
deliberative process, and therefore risk lowering the quality of policy
decisions.
While I cannot support release of a videotape or any other verbatim
transcript of the FOMC meetings, I do believe that there might be benefits
from releasing a nonliteral but relatively complete record of FOMC proceedings




170

3
similar to the "memorandum of discussion" that we prepared until

1976, i f

there were a long and enforceable delay of the release. As I said in my
earlier letter, such a record would assist researchers interested in monetary
policy by helping them focus more clearly on the issues that most concerned
the Committee at a particular meeting and by strengthening their appreciation
of some of the more practical aspects of formulating policy.

Over a long

period of time it might also provide a clearer picture of the evolution of the
positions of various members of the FOMC than is currently available, which
some researchers might find useful.
I believe strongly that such a nonliteral record should only be released
after a delay of several years, such as the five-year period in the case of
the memorandum of discussion.

Early release of even a nonliteral record like

the memorandum could inhibit FOMC discussion and reduce the quality of
monetary policy decisions.

Consequently, I think it is essential that any

reinstitution of something like the memorandum of discussion be accompanied by
a legislative guarantee that it would not be released prematurely.
FOMC Policy Decisions.

The second change proposed in HR 28 is to

release the directive one week after an FOMC meeting.
both for and against this proposal.

Arguments can be made

Earlier release would be consistent with

the general principle that we should inform the public of policy decisions as
soon as possible.

At the same time, I believe that early release of the

directive could well have announcement effects that could create unnecessary
volatility in interest rates.

The FOMC's policy decision at a particular

meeting is often conditional on economic data that become available in the
period after the meeting, and the language of the directive frequently
reflects this conditional element.




If the directive were released soon after

171
4
the meeting, interest rates typically would react immediately to any policy
action contemplated in the directive even though the actual policy action had
not yet been taken.

If the action subsequently did not take place, then the

initial reaction of rates would be reversed.
One can distinguish, of course, between the part of the directive that
announces the Committee's decision regarding any immediate policy actions and
the part that may predispose the Committee to undertake a particular future
action.

It is the latter, conditional part of the current directive that

causes my concern regarding financial volatility because it suggests a
direction in future policy that may or may not be implemented subsequently.
This problem could be dealt with by removing the conditional language from the
directive.

Doing so, however, could well reduce the usefulness of the

directive, both as a policy instruction to the Trading Desk and as a focal
point for the Committee's deliberations.

The Committee would need to consider

very carefully the potential loss from changing the form of the directive
before making any such change.
Notes on FOMC Meetings.

Let me respond now to the specific questions

raised in Chairman Gonzalez's letter regarding my knowledge of notes made at
FOMC meetings.

As I indicated earlier, I have attended FOMC meetings for a

number of years, mostly as the advisor to the president of the Richmond
Reserve Bank.

While in this advisory position I took notes in order to serve

the president more effectively.

Monetary policy is a continuous process in

which particular issues, such as how to interpret the behavior of the monetary
aggregates, frequently recur at subsequent meetings.

Consequently, it is

sometimes helpful, in preparing for a meeting, to be able to review the
discussion of a particular issue at an earlier meeting.




I used my notes for

172

5
this purpose during my years as an advisor.

The notes were handwritten, were

never transcribed to typewritten or any other form, and were not distributed
to anyone.

I have always kept these notes in locked, confidential files.

I

should add that I have taken only very partial notes since assuming my current
position at the beginning of the year.

I now rely on the notes taken by my

advisor, who follows exactly the same procedures I did.
I have only limited knowledge of notes or records made by other FOMC
participants and have not read or used any such notes.

Finally, I do not

personally know of any information that has been released by anyone at the
Federal Reserve Bank of Richmond or elsewhere in the Federal Reserve to
persons outside the Federal Reserve prior to its official release.




173
ORAL TESTIMONY
presented to
House Committee on Banking, Finance and Urban A ffairs




by

Thom as M. H oenig

President
Federal Reserve Bank o f Kansas City
Kansas City, M issouri

October 19, 1993
W ashington, D.C.

174

G o o d morning, Mr. Chairman and members o f the Committee. M y name is
Thom as M. H oenig, and I am president o f the Federal Reserve Bank o f Kansas City.
This bank serves the Tenth Federal Reserve District, which includes C olorado, Kansas,
Nebraska, Oklahoma, W yom in g, the northern half o f New M exico, and the western
third o f M issouri.

I am pleased to have the opportunity to express m y views on the

disclosure o f inform ation from Federal Open Market Committee (F O M C ) meetings.
The Federal Reserve must be accountable for its actions and has an obligation to
disclose as much inform ation as possible about its deliberations and decisions subject
to maintaining the highest possible level o f p olicy effectiveness.

It is m y b elief that

the Federal R eserve’ s current disclosure policies achieve these ends.
The current policies provide a detailed accounting o f F O M C deliberations and
decisions. The minutes o f F O M C meetings are comprehensive.

They docum ent the

inform ation considered during a meeting and the decision o f each voting m ember.
M oreover, the minutes provide the rationale fo r the m ajority’ s decision and include
statements filed by m embers w h o dissent from the majority. In addition, the Federal
Reserve reports regularly and frequently to Congress, ensuring further that we are
accountable for our monetary p olicy actions.
Current procedures foster an environm ent o f open and candid discussion am ong
the m em bers o f the F O M C .

V aluable information from a variety o f sources is brought

to the discussion, som e o f it provided with the understanding that it be kept
confidential.

The give and take am ong members provides an opportunity to clarify

issues and allow s the F O M C to synthesize a range o f views. A ny proposals that w ould
impair this deliberative process, given current procedures that ensure accountability,




175
w ould com prom ise the quality and effectiveness o f Federal Reserve monetary p olicy.
Current procedures, in my opinion, also strike an effective balance between
timely disclosure and the need for flexibility in the con d u ct o f monetary policy. These
procedures, which provide for the release o f the minutes shortly after the subsequent
meeting, allow the FO M C to respond flexibly to various contingencies over the
intermeeting period. Earlier release o f the minutes w ould restrict this flexibility and
could have the unintended effect o f contributing to market volatility.
With regard to the three specific questions posed to me in Chairman G on za lez’ s
letter o f September 24, 1993, m y answers are as fo llow s. One, I make brief notes for
my personal use during F O M C meetings. Our bank’ s Research D irector also
occasionally takes notes. These notes are kept in locked files, as is other confidential
F O M C material. T w o, I have observed other participants taking notes during F O M C
meetings, but I have no know ledge o f their content or disposition. Three, I have no
information about the release o f information by anyone em ployed at the Federal
Reserve about FO M C meetings prior to the official release o f that inform ation by the
Federal Reserve.
In closing, let me reiterate that I believe the F O M C must be accountable for its
actions, and I believe that its current disclosure p olicies are appropriate and effective in
achieving this end. They provide the public with com prehensive information about the
F O M C ’ s decisions and deliberative process and they enhance the Federal R eserve’ s
ability to pursue the nation’ s objectives o f e c o n o m ic growth and price stability.
That concludes my statement, Mr. Chairman. Thank you.




176
FOR RELEASE ON DELIVERY
10:00 A.M. EDT
OCTOBER 19, 1993

Testimony by

Jerry L. Jordan

President

Federal Reserve of Cleveland

before the

Committee on Banking, Housing, Finance and Urban Affairs




U.S. House of Representatives

October 19, 1993

177
M r Chairman and Members of the Committee, I welcome the opportunity
to appear before you this morning to discuss the release of information about the
meetings of the Federal Open Market Committee.
Before I respond to the three specific questions raised in your letter of
September 24, 1993, I would like to address a general issue that I believe is
highly relevant.
The questions of what information to release and when to release it must
be answered in the context of accountability for achieving clear, unambiguous
objectives for monetary policy. If the FOMC is charged with conflicting or
unattainable objectives, discussions about the appropriate timing and content of
disclosure could easily reflect misplaced priorities. Congress could best
contribute to a clarification of the FOMC's policy direction by enacting the Neal
Resolution, which specifies an ultimate goal of achieving the highest sustainable
rate of real economic growth through the maintenance of purchasing power
stability. The timing and content of disclosure become less contentious issues in
the presence of a credible framework for monetary policy.
Markets operate more efficiently with knowledge of the collective thought
process that generates Committee decisions. Such information allows people to
deal with uncertainties about how policy actions might respond to unknowable
future developments.
It takes some time to ensure members' agreement on an accurate
portrayal of a meeting, and to remove sensitive material. Thus, the minutes of a
meeting, describing the climate and substance of Federal Open Market
Committee decisionmaking, are released only after their formal acceptance, at
the next regularly scheduled meeting.
Meeting minutes are released through an orderly process that guarantees
equal access for everyone who wants to receive them, simultaneously, at




178
numerous sites nationwide. In the interim, prior to release, actions in the open
market are taken in accordance with a publicly understood procedure. Within
seconds of any market action, electronic information services communicate the
facts nationwide.
As a member of the Committee, I find it objectionable to see news stories
that are not written on the basis of the Committee's well-defined, orderly
procedures for information security and release. I do not condone the actions of
individuals who unilaterally release such information, even through
inadvertence. Chairman Greenspan indicated last week that measures have
been taken to ensure that the procedures adopted by the Committee are
followed.
You have asked me to respond to three specific questions. First, I do not
take notes at an FOMC meeting. At the first few meetings I attended in 1992, I
took a few notes during Committee meetings to remind me later of issues raised
in the course of discussion, but soon decided that I did not need notes to remind
me of the important issues. If I want staff analyses of theoretical or empirical
issues in preparation for subsequent meetings, I discuss the issues with senior
policy advisers. All this is done in accordance with the Committee's standard
rules for maintaining confidential FOMC information. We adhere to a "need to
know" policy when relating information to research economists conducting
studies on policy issues. Second, I have not questioned any other participants
in FOMC meetings about the procedures they follow, and consequently am not
aware of whether they keep notes or records of the meetings. Finally, I have no
information about the premature disclosure of FOMC meeting materials by
anyone employed at the Federal Reserve.




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2

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179
For release on delivery
10:00 a.m. EDT
October 19, 1993

Remarks of
Silas Keehn, President
Federal Reserve Bank of Chicago
before the
United States House of Representatives
Committee on Banking, Finance and Urban Affairs




Washington, D.C.
October 19,1993

1 80

Mr. Chairman and Members of the Committee:
As requested, let me briefly summarize my views on the question of the
appropriate record keeping and public release of the deliberations of the
Federal Open Market Committee.
As I stated in my letter of January 13 of this year to the Chairman of this
Committee, I fully support Chairman Greenspan’s previously stated position on
the various proposals for maintaining and releasing a more detailed record of
the FOMC’s deliberations. In my view, the minutes of the FOMC, as they are
currently written, provide the right level of reporting and detail necessary to
communicate the current policy concerns and actions of the Committee. The
minutes explicitly document the full range of policy arguments made during the
discussion and when a member of the Committee disagrees with the resulting
consensus, that member’s dissent becomes an integral part of the public policy
record.
Based on my participation in FOMC deliberations, I believe that releasing
more detailed minutes, most especially a verbatim transcript of the meeting,
without a significant delay would be counterproductive and would impede the
development of sound monetary policy — first, by limiting the free flow of
necessary information into the policy process and second, by hindering the
consensus process so essential if policy is to adequately reflect economic
conditions in all regions of the country.
As President of the Federal Reserve Bank of Chicago, I have an important
responsibility to convey to the FOMC the economic conditions of the Seventh
Federal Reserve District. To meet this responsibility, I and other senior
members of our staff maintain extensive contacts with District businesses (large
and small), community groups, and state and local government officials. From




181

these individuals we are able to gather a wide array of highly significant
information about the District that cannot be derived from the public data
sources — information not only about current economic conditions, but about
changes in business practices, future production, labor negotiations, investment
and hiring plans and a host of other issues that have important value to the
policy process.
This type of information is particularly important at the present time. The
economy is going through a very different phase than any that we have
experienced in the past. Many of the economic indicators that have been useful
guideposts in developing policy in the past are now proving unreliable. In such
an environment, I find the regional information derived from local contacts, both
about the Seventh District and elsewhere in the country, essential to the policy
process. In the context of these hearings, it is important to understand that
much of the information that these contacts provide is highly proprietary and
very confidential in nature. I have absolutely assured these contacts that the
source and nature of the data will not be divulged in a way that they would find
compromising. I have never had anyone decline to speak with me about their
activities. If I could not provide such assurances, then much of this significant
information would not be forthcoming and the development of monetary policy
would be impeded.
It is precisely this type of information about local businesses,
communities and financial institutions that demonstrates the value of the
regional structure of the Federal Reserve System and District representation on
the Federal Open Market Committee. The impact of releasing such information
as part of the written record of the FOMC without a significant delay would only




-2-

182

result in the exclusion of this vital information from the FOMC policy discussion.
In my view, this would not be in the public interest, especially when the current
system of disclosure is able to convey an accurate description of the key issues
and arguments underlying the FOMC decisions, as well as record individual
votes and dissenting positions. If it became necessary to prepare more detailed
minutes, then they should only be released after a period of five years and with
alt confidential information about individual corporations excised, as well as
confidential information about foreign countries, foreign central banks and
international institutions.
As to the specific questions you asked us to address:
I prepare an outline of economic conditions in the District which forms the
basis for my remarks at each meeting of the FOMC. After the meeting, these
notes are kept secured in my office until the next meeting at which time I
destroy them. I do not maintain notes on the discussion that takes place at the
meeting itself and Chairman Greenspan is in a better position to describe the
records that are kept by the FOMC Secretariat.
As to the premature release of information from the FOMC meetings, I
have not talked to the press or other outside contacts, nor to other Federal
Reserve officials who do not have authorized access to FOMC information and
my only direct knowledge of such premature releases arises from articles that I
have seen in various newspapers. I completely concur with Chairman
Greenspan that premature releases of this type are highly inappropriate and
totally unacceptable.
Thank you.




-

3

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183
For release on delivery
10 a.m. E.D.T.
Tuesday, October 19, 1993

Statement by
Robert D. McTeer, Jr.
President
Federal Reserve Bank of Dallas
Before the
Committee on Banking, Finance, and Urban Affairs




U.S. House of Representatives

Washington, D.C.
October 19, 1993

184

Thank you, Mr. Chairman, for your invitation to te stify on HR 28.
As requested, I w ill limit my testimony to the issue of FOMC records,
although I do have opinions on other parts of HR 28, especially the part
that puts me out of work.
I became President of the Dallas Fed in February 1991, so I'm a
relative newcomer both to the FOMC and to your great state of Texas,
Mr. Chairman. As the bumper sticker says, " I w asn't born in Texas,
but I got there as soon as I could. "
Prior to moving to Texas tw o and a half years ago, I was w ith the
Federal Reserve Bank of Richmond for 23 years, the last 11 of which I
served as manager of its Baltimore Branch. I have participated in
FOMC meetings since 1991, but did not vote until this year.
You asked us to respond to three specific questions regarding
note-taking in FOMC meetings. Regarding my own practice, I don't
take notes of the type I assume you mean. I do a lot of reading and
homework prior to the meeting, and I go into the meeting w ith some
tentative ideas in mind. I doodle during our discussion and occasionally
w rite down a word or phrase for reference when I speak. I don’t w rite
down decisions because they are simple and easy to remember and




1

185
come at the end of the meeting. My doodles and notes would be of no
use to traders or journalists. I destroy them after the meeting and rely
only on official documents for future reference.
Regarding your second question, notes kept by others, my
impression is that most other members and sta ff probably follow a
pattern similar to my own since all who are present presumably have
access to the official records and documents.

A t least, I have no

knowledge to the contrary.
In answer to your third question, I have no information about the
premature release of FOMC information by anyone at the Federal
Reserve. Let me add that, in my opinion, if someone wanted to leak
valuable information about the Com m ittee's decisions, such notes
would not be necessary nor even very helpful. While the decision
process may be difficult, the decisions themselves are simple and easy
to remember. Let me comment briefly on other aspects of meeting
records. As a former economist, I have some sympathy for the idea of
immediate release of the directive. Immediate release of the decision
would eliminate any question of leaks or the appearance of leaks.
The practical problem w ith immediate release of the directive is




2

186
that not all decisions are clear-cut decisions to ease, tighten, or remain
unchanged. On occasion, the Committee votes to hold steady, pending
further information or developments, and wishes to give the Chairman
extra leeway to act on his own prior to the next scheduled meeting.
More often that not, I believe, these "asymmetric directives" are not
acted on, but occasionally they are. To announce a decision of "no
change" w ithout the proviso would be misleading, and to announce it
w ith the proviso would likely cause the markets to react in a way not
necessarily warranted by subsequent information.
Given this dilemma, I believe the current arrangement is best.
Markets are able to discern the immediate decision by watching the
federal funds rate the following morning, and we retain maximum
flexibility to react to incoming data and changing circumstances
w ithout misleading anyone. Then as soon as another meeting is behind
us, we release the directive that includes the prevailing circumstances,
the rationale for the decision, and the identity of any dissenters and
their reasons for dissenting.
1
,

personally, have a greater problem w ith videotaping and

verbatim transcripts of discussions than w ith prompt release of




3

187
decisions. I believe that videotaping or verbatim transcripts, no matter
when they are released to the public, would diminish the quality of our
deliberations. My colleagues and I are willing to listen to each other
and adjust our initial leanings in the interest of consensus-building. We
currently don’t posture for the record or for the camera. There is no
winning or losing the debate. There is no playing to the gallery or to
the folks back home. This, i'm afraid, would all change w ith
videotaping or its equivalent.
I

would much prefer present arrangements even w ith more detail

added, so long as the detail involves the substance of the discussions
and decisions rather than the language used. I would also have no
objection to detailed minutes (not a verbatim transcript) being released
after a lengthy period, so long as the legal obstacles to a decent delay
could be overcome.




4

For release on delivery
10 a.m. EDT
October 19, 1993

Statement by
Thomas C. Melzer
President, Federal Reserve Bank of St. Louis

before the
Committee on Banking, Finance and Urban Affairs




United States House of Representatives

October 19, 1993

189

I am pleased to appear before the Committee today to testify on Section 4 of the Federal
Reserve System Accountability Act of 1993, entitled "Prompt Public Disclosure of Open
Market Committee Meetings." As a creation of Congress, the Federal Reserve System is
fully accountable to the public for its monetary policy actions. One way the Federal
Reserve ensures this accountability is by releasing information about its policy decisions.
The Federal Open Market Committee (FOMC) provides a full accounting of its actions in
its "Minutes of the Federal Open Market Committee" (Minutes).
The Minutes contain all important information about FOMC decisions, including the
policy directive agreed upon by the majority and the reasons underlying policy decisions.
Any significant differences among those voting with the majority, as well as the views of
any dissenting members, are included in the document. The Minutes are released upon
their approval by Committee members at the next FOMC meeting. The public record thus
contains the outcome of FOMC deliberations and the policy views of each member of the
committee.
I am not in favor of producing a further detailed account of FOMC deliberations, either in
the form of an edited transcript, such as the "memorandum of discussion," verbatim
minutes, or an audio or videotape. Such a release would impede the deliberative process
and thereby impair policymaking.

Arriving at appropriate policy often involves

considerable give and take, consensus-building and debate of alternative actions. Because
of the possibility that a particular statement might be misunderstood or taken out of
context, FOMC members would be reticent to engage in the kind of open discussion that
leads to good policymaking if they knew that all of their statements would be in the public
record. Furthermore, the release of verbatim minutes or any other detailed record of
deliberations would discourage other parties from supplying the FOMC with confidential
information that is useful in determining appropriate policy.




190
Turning to the timing of the release of the FOMC policy directive, I believe that immediate
release of the outcome of FOMC deliberations would interfere with the deliberative
process and would lessen the flexibility with which the Federal Reserve can respond to
changing economic conditions. If directives were released immediately, the FOMC might
be reluctant, even if economic conditions warranted, to take a timely subsequent action
because of concern that such action would add to the uncertainty in financial markets. In
addition, the FOMC would be less inclined to bias its directives toward ease or restraint, in
effect limiting its policy options.

Consequently, reaching a consensus among FOMC

members would be difficult, which might delay policy actions and add uncertainty to
financial markets.
Finally, let me turn to the specific questions that I was asked to address in my statement.
•

In response to your inquiry about my own notes or records, I usually take some
notes at FOMC meetings for my personal use. They are not typed, copied or
shared with anyone else and are maintained in a locked file cabinet in my office.

•

Your second question concerns my knowledge of notes or records that others have
made at FOMC meetings. Though others who attend FOMC meetings sometimes
appear to take notes, I am unaware of their content, disposition or location.

•

In response to your third query, I have no knowledge about the release of
information on FOMC meetings prior to its official release by the Federal Reserve.

To sum up, the Federal Open Market Committee is committed to informing the public of
its policies, which ultimately must be judged by their results. The "Minutes of the Federal
Open Market Committee" convey fully the relevant information about FOMC decisions
and do so in a timely way. Thus, in my view, there is little to be gained by providing
detailed minutes or mechanical reproduction of FOMC deliberations, while the adverse




191
consequences of doing so are potentially very great. In addition, the benefits of immediate
release of the policy directive would not seem to outweigh the potential costs of doing so.
By inhibiting the frank exchange of views and possibly reducing the willingness of the
FOMC to take timely actions, public release of the details of committee deliberations or
immediate release of the policy directive could harm the policymaking process. Though
intending to increase the accountability of FOMC members, the proposed changes
specified in HR 28 may thus impede monetary policy performance.
Thank you.




192
For Release at 10:00 a.m. E.S.T.
October 19, 1993

TESTIMONY
by

Gary H. Stern
President
Federal Reserve Bank of Minneapolis
before the
Committee on Banking, Finance and Urban Affairs




U.S. House of Representatives
October 19, 1993

193

SUMMARY

Mr.

Chairma n and members of the Committee,

to discuss
Committee

I a p p r e c i a t e this o p p o r t u n i t y

issues re l a t e d to mainta i n i n g a rec o r d of Fe d e r a l O p e n M a r k e t
(FOMC) meetings and procedures fol l o w e d at the Federal R e s e r v e Bank

of Minneapolis to handle confidential m o n e t a r y p o l i c y material.
indeed,

significant matters.

I will try to keep m y comments

Th e s e are,

direct and

succinct this m o r n i n g and ask that my complete s t a t e m e n t be inc l u d e d in the
record.

As

indicate d in my Ja n u a r y correspondence,

considerable value

I am c o n v i n c e d there is

in our current report of FOMC p r oceedings.

As y o u know,

we

release extensive minutes of each FOMC m e e t i n g s h o r t l y after the subse q u e n t
meeting.

The minutes describe the dis c u s s i o n and the votes of individual

members.

More specifically,

here and abroad,

price developments,

and monet a r y aggregates.
the economy,

they include an a s s e s s m e n t of bus i n e s s conditions
and the p e r f o r m a n c e

of f i n ancial mark e t s

They report the Commit t e e ' s vi e w s of prosp e c t s for

frequently including info r m a t i o n g l e a n e d from per s o n a l contacts

in individual Federal Reserve Districts.

The m i n u t e s

also report d i s c u s s i o n

of m onetary poli c y options as well as the d e c i s i o n u l t i m a t e l y re a c h e d b y the
Committee,

including dissents,

if any,

a n d the logic u n d e r p i n n i n g the

dissents.

This amounts to a g ood deal of i n formation in m y view,
merit in suggestions
FOMC deliberatio n s

to p repare and release,

a literal re c o r d of

-- t hrough videot a p i n g or other vehicles.

partic u l a r concern me.




at any time,

First,

and I do not find

Three issues in

given the g ravity of our r e s p onsibilities,

I

194

b elieve

it imperative that the quality of our deliberations be maintained.

O pe n discussion of ideas,

of p o l i c y alternatives,

and of s i g n i f i c a n t p o tential

risks to the econ o m y are c r itical to sound policymaking.
the information we discuss

Secondly,

some of

is v o l u n t a r i l y provi d e d on a c o n f i d e n t i a l basis.

We have an obliga t i o n to m a i n t a i n that confidentiality.

Thirdly,

I believe

our procedures caref u l l y b a l a n c e the n e e d to p rovide i n f o r m a t i o n to the p u b l i c
w i t h the ne c e s s i t i e s

of effective monet a r y policy.

Even small changes ca r r y

the considerable risk that they will disturb, perhaps u n k n o w i n g l y an d
u nintentionally,

this balance,

w i t h adverse consequences for f i nancial mark e t s

and economic performance.

As i n d icated in my e arlier correspondence,

I believe there could be some

m e rit to r e i n t r o d u c t i o n of something like the "memorandum of d i s c u s s i o n , " a
ver y detailed,

altho u g h edited,

accounting of FOMC discussions,

p r o v i d e d that

the c o n f i d e ntiality of such material is assured for several years.
it,

such a document coul d be useful to historians and students

policy whe n they investigate

As I see

of m o n e t a r y

the br o a d context of p o l i c y decis i o n s and the

evolution of the p o l i c ym a k i n g process.

Finally,

in response to yo u r specific inquiries about c o n f i d e n t i a l i t y , I

am unaware of any unau t h o r i z e d release of monetary policy i n f o r m a t i o n ever
e manating from the Federal R e s erve Bank of Minneapolis.

My ec o n o m i c advisor

and I leave h i g h l y confid e n t i a l material at the B o ard of G o v e r n o r s and do no t
return wit h it to Minneapolis.
does my advisor.
strict guidelines,

I take limited notes during the meeting,

as

A ll notes and other materials are h a n d l e d a c c o r d i n g to
the essence of which is to limit their d i s t r i b u t i o n and




2

195

access and assure proper disposal.
appended to m y complete testimony.)




(A c opy of our B a nk's pro c e d u r e s
T h a n k you.

3

is

196

TESTIMONY

Mr.

Cha i r m a n and members of the Committee,

to discuss
Committee

(FOMC) meeti n g s

of Mi n n e a p o l i s
indeed,

As

I appreciate this o p p o rtunity

issues rela t e d to mainta i n i n g a record of Federal Open Mark e t
and procedures

followed at the Federal Reserve B ank

to hand l e confidential monetary policy material.

These are,

significant matters.

i ndicated in my J a n u a r y correspondence,

considerable value

I am convinced there is

in our current report of FOMC proceedings.

As y o u know,

we

release extensive minutes of each FOMC meeting shortly after the s ubsequent
meeting.

The minutes describe the discussion and the votes of individual

members.

M o r e specifically,

her e and abroad,

price developments,

and m o n e t a r y aggregates.
the economy,

they include an assessment of b usiness conditions

frequentl y

and the p erformance of financial markets

They report the Committee's views of prospects for
i n cluding information g leaned from p e rsonal contacts

in individual Federal R eserve Districts.

The minutes also report dis c u s s i o n

of mon e t a r y poli c y options as we l l as the d e cision ultimately r eached by the
Committee,

including dissents,

if any,

and the logic underp i n n i n g the

dissents.

In light of these m i n u t e s , I believe that the views of the Committee
members

are known.

o ther ways.
meetings,

In addition,

Certainly,

FOMC members

I take full r e s p onsibility for my p o sitions

and I have p r e s e n t e d m y policy views

M i n n e apolis publications,
and one from 1993,

reveal their po l i c y po s i t i o n s

among other places.

at FOMC

in Federal Re s e r v e Ba n k of
(Two examples,

are app e n d e d to this document).




in

one from 1990

In addition,

Congress can

197

at any time ask us about our views, as the Senate Banking Committee did last
March.

Thus, a good deal of information is available in my view, and I do not
find merit in suggestions to prepare and release, at any time, a literal
record of FOMC deliberations * - through videotaping or other vehicles.
issues in particular concern me.

Three

First, given the gravity of our

responsibilities, I believe it imperative that the quality of our
deliberations be maintained.

Open discussion of ideas, of policy

alternatives, and of significant potential risks to the economy are critical
to sound policymaking.

Secondly, some of the information we discuss is

voluntarily provided on a confidential basis.

Much of this information would

be lost if we were unable to insure the integrity of confidential treatment.
Moreover, we have an obligation to respect anonymity and confidentiality.
Thirdly, I believe our procedures carefully balance the need to provide
information to the public with the necessities of effective monetary policy.
Even small changes carry the considerable risk that they will disturb, perhaps
unknowingly and unintentionally,

this balance, with adverse consequences for

financial markets and economic performance.

As indicated in my earlier correspondence,

I believe there could be some

merit to reintroduction of something like the "memorandum of discussion,1 a
1
very detailed, although edited, accounting of FOMC discussions, provided that
the confidentiality of such material is assured for several years.

As I see

it, such a document could be useful to historians and students of monetary

2

7 3 -2 0 8 0 - 9 4 - 8




198

policy when they investigate the broad context of policy decisions and the
evolution of the policymaking process.

Finally, in response to your specific inquiries about confidentiality, I
am unaware of any unauthorized release of monetary policy information ever
emanating from the Federal Reserve Bank of Minneapolis.

My economic advisor

and I leave highly confidential material at the Board of Governors and do not
return with it to Minneapolis.
does my advisor.

I take limited notes during the meeting, as

All notes and other materials are handled according to

strict guidelines, the essence of which is to limit their distribution and
access and assure proper disposal,
appended to this testimony.)




(A copy of our Bank's procedures is

Thank you.

3

199

C o n . .tv ,• i. i s !» \ (i

i > S i , r n . 1' < ■

The Goal of Price Stability

O ver the past year or two, there has been consider­
able discussion o f price stability as the preeminent
goal o f Federal Reserve monetary policy. This discus­
sion has generated support for the goal but has also
touched off a variety o f concerns, including the
compatibility o f this objective with other policy goals,
the potentially high cost o f achieving price stability,
and the means o f conducting policy to achieve this
objective. These concerns are worthy o f serious
consideration but, on balance, price stability should
remain the overarching goal o f monetary policy.
In two pieces o f legislation— the Employment Act

over which Federal Reserve policies have no influ­
ence or effect.

o f 1946 and the Full Employment and Balanced

Equally important, in the long run no funda­

Growth Act o f 1978— Congress has specified objec­
tives for monetary policy. T o paraphrase a bit, these

mental incom patibility exists am ong these multiple
objectives. T he principal contribution monetary pol­

objectives include achievement of high employment,

icy can make to achieve sustainable growth and high

econom ic stability and growth, price stability and

employment is to establish an environm ent o f overall

balance in our international transactions. Clearly,

price-level stability. Beyond dem ographic factors,

these objectives represent a highly desirable state o f

growth depends on the capital stock with which the

econom ic conditions, but I sense concern that if

labor force works. Capital investment is likely to

prominence, or preeminence, is given to one, es­
pecially price stability, others may be compromised.

do well in a non-inflationary environment. In sum,
price stability is com patible with the other ob jec­

That is, these objectives may conflict in a funda­

tives specified by Congress and is the principal

mental and lasting way, which implies that the policy

contribution the Federal Reserve can make toward

challenge is to somehow strike a reasonable balance

attainment o f those objectives and continuing eco­

am ong these objectives.
I don’ t find the vision o f fundamental conflict

nom ic prosperity.
Perhaps a more serious concern about dedicating

persuasive for several reasons. There is a plethora o f
evidence indicating that monetary policy signifi­

monetary policy so exclusively to achievement o f

cantly influences price performance, implying that, if

in the abstract, many fear that it would impose

properly designed and

substantial costs on the econom y in practice.

administered, policy can

price stability is that, while this objective is embraced

reasonably be expected to achieve price stability in
the long run. O n the other hand, the influence o f

Those who hold this view im plicitly, if not explic­
itly, accept the Phillips Curve notion o f a trade-off

monetary policy on the other objectives is limited and

between inflation and unem ploym ent or lost output.

indirect at best. For example, econom ic growth
depends in part on demographics such as labor force

If this notion is accepted, there is little doubt that

growth, and on the quality o f the labor force, matters




achieving price stability could prove very costly
indeed.

200
However, conventional Phillips Curve analysis

in part to swings in energy or agricultural prices that

ignores the potentially crucial role o f credibility in

d on ’ t relate well in every period to m acroeconom ic

achieving policy objectives. If the Federal Reserve

conditions. Similarly, we would continue to recog­

adopts and implements an anti-inflation policy that is

nize that current price performance results from past

widely believed and accepted by the public— that is

policies, so we would not necessarily react to every

credible— the costs associated with reducing the rate

new statistic on inflation. And there would be

o f inflation may be modest.

nothing in our strategy' to preclude a response to

In a recent publication, the Federal Reserve Bank

f ‘shocks,” such as a sharp break in stock prices, if that

o f San Francisco made this point very well. “ C redi­

were appropriate. Stated more positively, we would

bility means that the public quickly adjusts its

continue to bear in mind our responsibility for the

expectations concerning future policy in response to

safety and soundness o f the financial system, as well as

the announcement o f a change in policy, or to policy

the linkages between financial problem s and business

actions that suggest a new policy stance. Thus, a

activity. Setting course for price stability need, not

central bank with ‘credibility’ can announce a new

constrain our ability to deal with these situations.

disinflationary monetary policy and quickly achieve
a lower inflation rate without a prolonged econom ic

Indeed, to the extent that speculative excesses con­
tributed in the past to such problems, achievement of

downturn because the public expects it to follow

price stability may make such episodes less likely.

through with its new policy long enough to be
successful. Consequently, wage and price increases
moderate quickly.”
H ow m uch credibility does the Federal Reserve
have at present? I can’ t provide a quantitative an­
swer, but probably not as much as I would wish.
Thus, there are likely to be some costs, in terms o f
foregone output, in achieving price stability. But if an
anti-inflation strategy is consistently pursued, credi­
bility can be earned and costs held to reasonable
levels.
Assuming that price stability is, in fact, the para­
mount goal o f policy, what should the Federal Reserve
do to achieve this objective? In my judgm ent, policy
formulation and implementation would probably
have to change little from current procedures.
Growth in the monetary aggregates, especially M 2,
would be used to help assess and guide policy, and
M 2 growth would have to be reduced over a series o f
years to a pace consistent with stable prices. In terms
o f M 2 growth ranges, the upper end would have to be
lowered steadily to assure that there is no backsliding
in this process.
W e in the Federal Reserve would continue to
recognize, as we do today, that price measures
themselves may bounce around in the short run, due




201

T

o p

o f

t h e

Comments

N

by

i n t h

Gary

Stern.

President

Views on the Economy, Monetary Policy

Follanving is a summary of Gary Stern’ March 10,
s

Im portant in the district are the natural resource

1993, testimony before the Senate Committee on Bank­

industries o f agriculture, forest products and

ing, Housing and Urban Affairs. Stem, along with

m ining; diverse m anufacturing industries includ­

the other 11 Federal Reserve bank presidents, was

ing m odern computer, electronic and medical

called to testify on the state o f the district economy and

technologies; and tourism.

to share his views on monetary policy.

In the m iddle and late 1980s the district econ ­
om y was a bitweaker than the national economy.

Mr. Chairman and m em bers o f the Com m ittee,

T h e district did not benefit as much as others

I appreciate this opportunity to discuss with you

from the defense build-up, the com m ercial con-

econ om ic conditions in the Ninth Federal

strucdon spree, or the real estate price run-up.

Reserve District and my views on m onetary poli­

Consequently, though, w hen these areas turned

cy. My task is somewhat easier today than it would

dow n, the district econ om y was affected relatively

have been eight years ago, right after I first took

less than the national econom y.

office. O ver this period econ om ic conditions

In addition, the district has been fortunate to

generally have im proved in the Ninth District,

have som e growth industries within its borders.

and over this period I have had the opportunity

T h e district econom y has been supported by

to refine my views on the role and cond uct o f

growth in exports, m edical instrument manufac­

m onetary policy. Let m e briefly address these two

turing, residential construction, medical serrices

topics in turn.

and tourism. And, notably, agriculture has for the

T he Ninth District econom y is doin g well rela­
tive to the national econom y today, in large part
because it did not participate as fully as some o f
the regions o f the nation in the expansion and

most part recovered appreciably from the serious
problem s o f the mid-1980s.
However, I d o not want to give the impression
that all is well in the Ninth District. Not all indus­

excesses o f the m iddle and late 1980s. While the

tries and not all regions are prospering. In partic­

rest o f the nation was affected by unsustainable

ular, som e natural resource industries, com m er­

expansions and subsequent sharp contractions in

cial construction, com puter manufacturing and

some sectors the Ninth District was m ore steady-

small-town retail stores all have been slumping to

as-you-go. Moreover, inflation appears to have

som e degree. Nevertheless, I think it is fair to say

diminished in the district in recent years.

that as a whole the district econom y has

T he Ninth District has a relatively small p op u ­
lation, but it is large geographically and contains
a diverse industrial base. T he Ninth District

im proved.
T he fortunes o f the district’s banks largely
have reflected the ups and downs o f the district’s

includes the states o f Montana, North Dakota,

econom y. In 1986 the district’s banking system

South Dakota, and Minnesota, as well as western

was far from healthy. The lagging effects o f the

Wisconsin and the U pper Peninsula o f Michigan.

1981-82 recession, difficulties in the agricultural

2 THE REGION, JUNE 1993




202

standards for our citizens over time. In ord er to
give this goal operational meaning, the Federal
Reserve in my view should seek to achieve over
time m axim um sustainable growth o f real output.
My reading o f the accum ulated evidence on
sector and problem s with loans to less developed

econ om ic perform ance both here and abroad is

countries had com bined to weaken banks’ finan­

that in the long run the most significant contri­

cial con d id on . But since then, banking con d i­

bution m onetary policy can make to achieving

tions have im proved. Asset quality, earnings and

m axim um sustainable growth in real output is to

capital all have im proved. In the first three quar­

foster price stability. T hat is, I am convinced that

ters o f 1992 only 2 percent o f the district’s banks

in the lon g run, price stability goes hand-in-hand

reported losses, dow n from 20 percent in 1986.

with sustained econ om ic prosperity. T he two

M uch o f the inform ation I get on the district

goals are not antithetical and, indeed, price sta­

econ om y com es first-hand from District Dia­

bility is best thought o f as a means to the end o f

logues with com m unity and business leaders and

sustained prosperity.

from meetings with the bank’s directors and advi­

In the short run, we in the Federal Reserve

sory coun cil on small business, agriculture and

may in deed find it appropriate to respond to

labor. O ur involvement in district econ om ic

in com ing financial and econ om ic inform ation in

affairs has served both the com m unity and Feder­

order to keep the econ om y on, or to return it to,

al Reserve policymaking well, I believe.

its potential growth path. But, it seems to m e, our

T h e state of, and prospects for, the regional

short-run response should in general be cautious

econ om y are important elem ents in my prepara­

because o f uncertainty both about the state o f the

tion for an approaching Federal O pen Market

e con om y and about the effects o f policy on the

Com m ittee m eeting. But, o f course, regional con ­

econom y. Moreover, we need to avoid the p rob ­

siderations must be balanced and integrated with

lem o f turning long-run policy into a sequence o f

inform ation about the national and international

short-run decisions. I f follow ed, such an

econom y, for ultimately the effects o f monetary

approach runs the risk o f adopting a strategy that

policy transcend regional boundaries. Thus, a

is persistently inflationary or contracuonary,

wide range o f factors, com b in in g regional eco­

dep en din g on conditions prevailing when it is

nom ic and financial inform ation with additional

adopted.

perspectives, helps to shape my view o f the appro­
priate course o f policy.
In the broadest sense, and taking a long-run
perspective, the object o f m onetary policy is, it
seems to me, to attain the highest possible living




I

Th«R«gton ]

203

Federal Reserve Bank of Minneapolis
Research Department Memorandum
Dale:

PACS: 2000.2

To:

(Relevant Individuals)

From:

Gary Stem

Subject: Safeguarding FOMC Class I, Class II, and Class III Confidential Material
To assure the necessary confidentiality, it is important that all staff mem­
bers exercise special care in handling FOMC materials. Please read the following
guidelines, sign attached sheet, and return to Vicki Reupke by Friday, (Date):
1.

In addition to ensuring that the documents themselves are made available only
to staff members who have been authorized access to them, the information they
contain should be discussed with such persons only.

2.

FOMC documents should not be left unattended on desk or table tops.

3.

All FOMC documents should be out of sight when outside visitors are in the
office.

4.

FOMC documents may be carried by hand from one office to another. If sent
by messenger, they should be placed in envelopes with a gummed-label seal
bearing the initials of the person sending them.

5.

When no longer needed, FOMC documents should not be disposed of by
dropping in wastebaskets but by shredding or incineration.

6.

All FOMC documents should be kept under lock and key at night and over
weekends.




204
2

7.

Double-sealed envelopes should be used for mailing all Class I and Class II
FOMC materials from the Board and the Reserve Banks. The inside envelope
for Class I material should be marked “Personal and Confidential” and delivered
unopened to addressees.

8.

No Class I or II documents should be reproduced by recipients.

9.

The distribution of all FOMC documents, apart from the Managers’ reports,
should be handled through the Secretary who will attach the appropriate security
classification before sending the documents to the Committee.

10. To facilitate the identification of FOMC documents that require safekeeping,
distinctive covers should be placed on all such documents that are to be circu­
lated System-wide. The Bluebook and the Greenbook are already distinctive in
appearance and are exempt from this requirement. Documents of especially
great sensitivity, e.g., copies of recently issued directives that are intended for
the “eyes only” of specified recipients, should be so identified with appropriate
further markings such as a special stamp or special cover sheet.




205
I have read the attached FOMC guidelines memo dated (




).

Signature and Date

206
For release on delivery
10:00 a.m. EDT
October 19, 1993




Testimony by

Richard F. Syron
Federal Reserve Bank of Boston

before the
Committee on Banking, Finance, and Urban Affairs
U.S. House of Representatives

October 19, 1993

207
Thank you, Mr. Chairman and members of the Committee for this opportunity to share my
views on maintaining a more extensive record of Federal Open Market Committee (FOMC)
meetings.
Being involved in the making of monetary policy is a great honor and something in which I
take deep personal pride. Thus, from a purely personal perspective, I might welcome my views
and positions being made more public. However, the key issue to me is what will provide the
best policy for the people of the United States and of the First District. I believe there are difficult
trade-offs between openness and the effectiveness of the deliberations that lead to monetary
policy.

I would like to mention two specific reasons that contribute to this trade-off.
First, I am concerned that a highly detailed accounting of FOMC deliberations, unless its

release were delayed several years, would impair the ability of the FOMC to obtain and discuss
confidential information on individual companies and foreign central banks -- information that is
essential to conducting monetary policy.
New England's experience in the recent recession is a relevant case in point. The recession
began earlier in New England and proportionately many more jobs were lost in the region than in
the rest of the country. A s a consequence, some problems surfaced in New England before they
emerged elsewhere.
For example, the difficulties experienced by New England banks contributed to a "credit
crunch" for small and medium-sized businesses. These problems were discussed at FOMC
meetings and helped shape policy. It would not have been possible to convey the seriousness of
the banking problems in New England, the potential for reduced credit availability and its impact
on the economy as a whole without reference to individual borrowers and lenders. Yet to make
such information public would have violated confidences; indeed, much information would never
have been volunteered and our understanding of the problems would have suffered greatly.




208

-

2-

Again, trade-offs are involved: the more specific are the references in the record of FOMC
deliberations, the longer would be the time lag required before disclosure, if access to valuable
but confidential information on individual companies is to be maintained and used.
Second, much of the discussion and economic information disclosed in FOMC meetings
pertains to the valuation of assets priced continuously in world financial markets. Fluctuations in
asset values can have a significant impact on the jobs of workers and on the incomes of
investors. Public disclosure of preliminary and exploratory FOMC discussions could generate
unintended value changes that could lead to harmful reactions and unnecessary volatility in the
economy.
In summary, the ultimate objective of monetary policy is to promote the highest standard
of living possible for Americans. The policymaking process should be as open as it can be,
without diminishing our ability to achieve that objective.
In regard to the three specific questions you posed, I generally take rough, handwritten
notes at FOMC meetings; these are subsequently kept in a locked drawer. Any notes taken by
the senior economist accompanying me are also kept securely or disposed of according to
procedures governing confidential documents. Except for the Secretary's maintenance of
Committee records, I have no direct information about how others may keep notes. I have no
information about individuals imparting information about FOMC meetings before official release.




209

STATEMENT OF ANNA J. SCHWARTZ ON OCTOBER 19, 1993
AT HOUSE BANKING COMMITTEE HEARINGS ON
THE FEDERAL RESERVE SYSTEM ACCOUNTABILITY ACT OF 1993 HR28
I am here to comment on two provisions in section 4 of HR 28 relating to
prompt public disclosure of Federal Open Market Committee

{FOMC) meetings.

One provision would require the Federal Reserve to videotape and
transcribe FOMC meetings and to make the videotape and transcription public
within 60 days after a meeting. Another provision would require the Federal
Reserve to make public within a week of an FOMC meeting the Domestic Policy
Directive voted upon and issued to the Trading Desk after each FOMC meeting.
Provision on Minutes and Their Disclosure
Let me first discuss the provision regarding the maintenance of detailed
records of Federal Open Market Committee deliberations and their public
disclosure.
To gain some perspective on this provision it is helpful to trace
historical developments on the availability to the public of information on
the Federal Reserve's conduct of monetary policy through its purchases and
sales of open market securities. Three subperiods may be distinguished on this
matter in the Federal Reserve's history:
period from 1936 through March 1975;
(1)

(1) the period before 1936;

(2) the

(3) the period since March 197 5.

In the period before 1936, abbreviated minutes of open market

committee meetings beginning 1922 were maintained but restricted to internal
use.

Information on the Federal Reserve's activities is, however, available in

two sources: the Library of Congress for the diaries of Charles Hamlin, a
member of the Federal Reserve Board from 1914 to 1936, and Columbia University
for the papers of George Harrison,
YorK Fed from 1928 to 1940.




a governor and then president of the New

210
Hamlin recorded his observations on the views of important Federal
Reserve personalities and the pressure of events on the decisions reached by
the Board. The Harrison Papers contain a wealth of documentary evidence
including the minutes of open market committee meetings, official
correspondence, memoranda exchanged in connection with those meetings, minutes
of meetings of the board of directors of the New York Fed at which System
policy was analyzed, and a full record of Harrison's conversations with
leading figures in the System.
(2) In the period from March 1936 through March 1976 detailed minutes or
memoranda of discussion were prepared for each FOMC meeting. Before 1965 these
records were held to be confidential documents.

In 1964 the FOMC adopted a

policy to release minutes of each meeting held through 1960 and for the
release of minutes for subsequent meetings with a five-year lag after the
calendar year in which minutes were taken.
This action by the FOMC was a response to Congressional requests in the
early 1960s for FOMC minutes and the publication in 1963 of A Monetary History
of the United States.

1867-1960 of which Milton Friedman and I are co-authors.

While the book was in draft, we sought but were denied access to the minutes
of the FOMC by the Federal Reserve at that time. We had to

substitute the

Hamlin diaries and Harrison Papers for the period they covered. By 1964,
despite its refusal two years earlier to let us see minutes of meetings,

the

FOMC apparently decided that disclosure of the minutes after a five-year lag
posed no threat to the Fed.
(3) In May 1976 the FOMC announced that after the March 15-16 meeting,
memoranda of discussion would be discontinued, and the views of individual
participants expressed at FOMC meetings would no longer be documented. The
announcement apparently was inspired by the adoption of the Freedom of




211
3
Information Act and the Sunshine Act that made it difficult for the Federal
Reserve to maintain confidential and secret information. The March 1975
meeting of the FOMC is the last one to date of which minutes have been made
public,
I favor reinstatement by the FOMC of its former practice of maintaining
detailed minutes of its meetings and publication of the record after a fixed
period of time to protect the Federal Reserve against premature disclosure of
ongoing unsettled issues. The record should be verbatim. A videotape is
neither essential or desirable. The record should be verbatim subject to
correction within a brief period by the participants for inadvertently
misspeaking.

If the Federal Reserve regards 60 days as too short a delay for

publication,

I would not object to lengthening the delay to one year.

Absence of the minutes of meetings since March 1975 has deprived
scholars of information on the formation of monetary policy and limits
research.

I am familiar with a recent proposal by a well-known scholar to

study Federal Reserve performance in recent decades. That scholar intends to
resort to interviews with former Federal Reserve officials as a substitute for
the unavailable minutes since 1975. The better course would be for the Federal
Reserve to publish whatever documentation it has maintained for each meeting
in the period since 1976.
Provision on the Directive and Its Disclosure
Let me now discuss the question of the appropriate length of delay of
the release of the FOMC Domestic Policy Directive. Current practice, which
began in 1976,

is for directives to be released after financial markets close

on the Friday after the subsequent FOMC meeting. This is a lag of
approximately 45 days after the meeting at which the directive was adopted and




212

after another directive has been adopted. The directive that is released is
always an outdated one.
The position of the Federal Reserve is that early release would harm its
ability to conduct monetary policy and the government's commercial interests.
It has asserted that prompt release of the directive would have an
announcement effect on financial markets. Market participants would hasten to
realize gains in anticipation of the FOMC's purchases or sales of securities
that would lead to substantial additional costs for the government's debt
financing. The Federal Reserve argument boils down to the claim that prompt
release would cause increased interest rate volatility that would raise the
average level of interest rates. Is there evidence to support these claims?
Although official release of the directive is delayed for approximately
4 5 days,

the Wall Street Journal has reported the contents of the directive

within a week of each of 11 FOMC meetings out of the 34 meetings that took
place between March 1989 and May 1993. These are leaks that the newspaper
attributes to "government officials" or "people familiar with the Fed's
deliberations." The newspaper stories correspond closely with the FOMC
directives that were later published.
Professor Michael T. Belongia of the University of Mississippi and his
co-author Kevin Kliesen have analyzed the 11 leaks as if they represented
immediate release of the directive. The authors examine changes in the
Treasury bill rate on each of five days before and five days after the Wall
Street Journal story appeared to see if the T-bill rate changes support the
Federal Reserve's argument that the early release of the content of the
directive would be associated with increased volatility in short-term interest
rates. They find that any such effect was negligible even when the directive




213
5
contradicted expectations based on current market rates. Moreover, even if
there were large responses of interest rates to each of the 34 directives
since 1989 on the assumption that they contained news different from existing
market expectations,

the increase in variance was numerically small. Belongia

and Kliesen also raise doubts that increased volatility of the limited
magnitude they find around the dates of leaks would raise the average level of
interest rates on all other days.
I reach two conclusions. One is that the Fed would be better advised to
release the directive promptly instead of selectively leaking its content.
Market participants scrutinize every scrap of information on prospective
Federal Reserve actions. The market will perform better if the scrutiny is
based on the actual directive, however delphic its content,
rumors and conjectures about the directive.

rather than on

It is hard to accept the view that

markets perform better the less information they have.
My second conclusion is that the Fed is needlessly concerned about the
supposed disturbing effects of prompt release of the directive on volatility
and the level of interest rates.
If FOMC meetings were held on Thursday and Friday and participants had
an opportunity over the weekend to review the verbatim record to correct
instances in which they misspoke,

the Fed could then release the domestic

policy directive on Sunday night.
Finally,

let me say that these hearings are devoted to peripheral

aspects of Federal Reserve operations. The hearings do not touch on the
substantive questions: What are the Fed's objectives? How effective are the
operating procedures it follows to achieve its objectives?




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1

Statement Prepared by A. James Meigs
for Hearings before the
Committee on Banking, Finance and Urban Affairs,
U. 5. House of Representatives
October 19, 1993
Mr. Chairman and Members of the Committee: It is an honor for me to
appear before you to express my view s on producing, maintaining, and
publishing records of the proceedings and policy decisions of the Federal
Open Market Committee. I am fam iliar with these materials because I used
them for many years as crucial sources of information for my work in three
major capacities:
1. As an economist with the Federal Reserve Bank of St. Louis, 19531961, where ! helped to provide analytical support for the President
of the Bank in preparing for his meetings with the Federal Open
Market Committee and in interpreting the discussions and policy
decisions afterwards.
2. A s a researcher, w riting and lecturing on money and banking,
monetary policy, and world financial markets.
3. As an economist or consultant for banks, securities firms, savings
and loan associations, and other institutions. One of my main
problems always was, and still is, how to figure out what
the Federal Reserve did in the past, is doing right now, and might do
in the future.
1 have had no experience in the oversight role implied by the
Congress's power "to coin Money, [and] regulate the Value thereof/1 in
Article I, Section 8, Clause 5, of the U. S. Constitution. However, 1 plan to
make some recommendations concerning the Federal Open Market Committee
Policy Record, the Memoranda of Discussion, and the Federal Reserve’s
policy mandate that i believe would be useful to this Committee and the
Congress in providing oversight.
Recommendations
1. The Federal Reserve should publish the Policy Record of the Federal
Open Market Committee within one or two days after each meeting
of the Committee. The Policy Record should clearly state any
changes in policy and the reasons for the changes.




215
2
2. The FOMC should resume the practice discontinued in 1976 of having
the Committee Secretary prepare a Memorandum of Discusston for
each meeting (the minutes). The Memorandum should summarize the
statements of each member of the Committee, each non-voting
Reserve Bank President (or alternate) attending the meeting, and
each member of the Committee Staff or Board Staff who presents
information or recommendations during the Committee discussion.
The Memorandum of Discussion should be released to the public
after one year.
3. The Congress should provide a clear mandate for the Federal Reserve
to pursue a stable price level for the U S. economy; i.e. to regulate
.
the value of money. This Banking Committee then could concentrate
on holding the Federal Reserve accountable for how it carries out
that delegated responsibility. .
in the rest of this statement I plan to explain some of the reasons for
the recommendations and to try to meet objections that you and the Federal
Reserve might raise. I believe that adopting these recommendations would
benefit all the classes of information users I mentioned above, including the
Federal Reserve itself and the Congress.
The Policy Record
At the end of my statement for hearings of this Committee on
September 11, 1973,1said:
My one additional suggestion is to eliminate the secrecy that now
cloaks the processes and decisions of the Board of Governors and the
Open Market Committee. I see no reason why Policy Directives of the
Open Market Committee should not be publicly announced immediately
after each meeting of the Committee, preferably with a discussion of
the reasons for policy decisions. Ending the secrecy would not only
facilitate the monitoring of System actions by the President and the
Congress, but it would greatly reduce uncertainty among the general
public.1
At the time I wrote that, I was advising clients in securities firms
and commercial banks. My Inability to provide them with more nearly
current information on Federal Reserve policies was extremely frustrating.
Now, twenty years later, I am even more firmly convinced that the Policy
Record should be released immediately after each meeting.




216

3
Participants in U. 5. and world financial markets are as skittish as
gazelles drinking from a river infested with crocodiles. Over the last
twenty years they have invested vast resources in equipment and techniques
designed to shorten the time they need to react to new information about
economic policies and prospects. Securities firm s and banks hire experts,
some of whom are former Federal Reserve officers, to analyze every scrap
of information they can pry out of Federal Reserve reports or the remarks of
Federal Reserve officials. They especially would like to know what the FOMC
decides about policy at each meeting and what circumstances might lead to
a change at a future meeting or in the period between meetings. The
slightest hint of a change in U. 5. monetary policy can affect securities
prices and exchange rates around the world within minutes.
These well known facts about financial markets’ sensitivity to
changes in Federal Reserve policy have been used in arguing for delay in
releasing the Policy Record in order to avoid destabilizing financial
markets, i believe to the contrary that the effects of reducing the delay in
releasing the Policy Record would be in the other direction. Immediate or
early release would exert a stabilizing influence on financial markets by
reducing uncertainty. That does not necessarily mean the markets would not
jump when a new issue of the Policy Record announces a policy change.
People with their own or clients’ money at risk adjust quickly to any
announced or suspected policy change.
Market jumps in reaction to early Policy Record releases might
embarrass policy makers, especially when interest rates or exchange rates
shift in an unpopular direction. But the markets would be more likely to
jump in a direction that would be consistent with Federal Reserve policy
objectives than when the markets react to rumors, leaks, innuendo, or
conjectures which later prove to be unfounded. It would be better to provide
the markets with the truth — whether potentially disturbing or not - - and
let them sort it out.
Early release of the Policy Record would have the further virtue of
leveling the playing field. Some market players now are believed to have
better access to information on Federal Reserve policy than others do. This
perceived inequality of access obviously can lead to hard feelings or worse
when some institutions believe competitors receive valuable information
from Federal Reserve sources sooner than they do. The Policy Record should
be thrown on the table for everybody at once as soon as the facts are in, like
a crop report.




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4

The Memoranda of Discussion
The Policy Record is useful as a way to keep financial markets and
the general public informed on current Federal Reserve policy and changes in
policy. It would be even more useful if it were released immediately after
each meeting. But it does not now provide enough detail on the discussions
preceding policy decisions to enable analysts to determine how decisions
are made and how the FOMC members react to various kinds of Information.
Contributions of non-voting members are not identified. Recording votes at
the end of a meeting does not reveal how the committee members d istill
their technical advice and masses of information into decisions for action.
The Memoranda of Discussion that were discontinued in 1976 provided
fascinating insights into FOMC policy making procedures, although with an
intolerably long delay. A new series of minutes or Memoranda of Discussion,
released with less delay, would be extremely useful to future policy
makers, researchers, and market practitioners.
Chairman Arthur Burns told the Subcommittee on Domestic Monetary
Policy in 1977 that he thought a bill to require the FOMC to maintain
detailed minutes and to publish them after three years was "clearly
motivated by a concern for the interests of scholars and others who may
have occasion to do historical research in the area of monetary policy."2
Numerous other researchers and I had written to the Subcommittee on
Domestic Monetary Policy to express various degrees of anguish over losing
the Memoranda of Discussion.3
Chairman Burns conceded that the newly revised and expanded Policy
Record "does not preserve a historical record as detailed as that contained
in the earlier Memoranda of Discussion." However, Chairman Burns said, "In
the absence of express statutory protection against premature disclosure of
the memorandum, we would feel compelled to object to a proposal for
returning to the practice of keeping extensively detailed minutes of FOMC
meetings.’ Monetary scholars evidently were not an effective interest group
*
in those days; H. R. 9465, which would have required keeping and publishing
FOMC minutes, never found its way to the President's desk for signature.
While expressing his regret over no longer producing FOMC minutes
for scholars to mull over, Chairman Burns slighted a much more important
group of readers. He hardly mentioned members and staff of the Open Market
Committee and innumerable people throughout the System who have to




218
5
interpret, explain, and carry out monetary policy. For example, at the
Federal Reserve Bank of St. Louts, we were not limited by the five-year
delay in releasing the minutes to the public. We used the draft minutes of
each meeting to help our President prepare for the next meeting. The
economist who accompanied the President to FOMC meetings seldom could
take enough notes to tell the rest of us who said what and why In a meeting
of 12 Reserve Bank Presidents, 7 Board Members, and several staff advisors.
We searched back issues of the minutes for references to points of view
that might not have seemed important at the time but became more
significant later. Hearings of the Subcommittee on Domestic Monetary
Policy in 1977 reported that several former FOMC members said they found
the minutes useful.4
The point of this anecdote is that Federal Reserve views on how
monetary policy should be formulated and carried out were evolving then at
a rapid rate, as they must still be evolving now. There was no clear manual
of procedure for dealing with a menu of policy problems. The FOMC was
adapting to changing economic conditions, changing financial institutions,
and changing doctrines in monetary economics. Because the membership of
the Committee was continually changing, the FOMC needed an Institutional
memory to organize and to preserve this learning experience for future
generations of policy makers.
The Memoranda of Discussion provided a fine vehicle and repository
for the FOMC Institutional memory. The Memorandum for each meeting
recorded the discussion, was reviewed by the participants to guard against
errors in transcription or wording, and was locked up in final form for
posterity at the next meeting, usually one month later. Years of such a
record of experience are now lacking, never to be retrieved.
The significance of keeping a consistent, comprehensive set of
minutes of the meetings was brought home to me when I tried to write
about an episode in FOMC history about 15 years after It had occurred.51
thought the Infra-committee policy discussions of 1959 and 1960 were
engraved on my brain, because they had provided an unusually clear contrast
between opposing views of how the Committee should tell the Open Market
Manager what to do. They seemed almost a laboratory demonstration of how
imprecisely framed instructions could produce results the Committee had
not intended. But when I checked the minutes I found I was off by months in
my chronology. I had forgotten some significant contributions from people in
addition to those I remembered as playing the leading roles. This experience
convinced me that an inside observer's memory of such complex discussions
can not be be trusted fully. Not even my own.




219
6

Keeping and publishing detailed minutes of FOMC meetings would help
to answer three overriding questions:
1 How do members of the Federal Open Market Committee learn to
.
exercise the awesome powers delegated to them?
2. How does a corporate body made up of ever-changing individual
members remember and employ what it learns from its mistakes and
successes?
3. How can the government that delegated those powers oversee the
performance of their stewards?
Former Reserve Board Member and Vice Chairman J. L. Robertson
summed up these issues in a letter to the Chairman of the Subcommittee on
Domestic Monetary Policy in 1976:
In my view, the formulation of monetary policy by the Open Market
Committee is one of the most important factors influencing the
economy. Hence it should be mandatory that there be kept a detailed
record (to be made available to Congress and the public after a lapse of
appropriate tim e)...
If minutes of the meetings are not kept and eventually made
available, there would be no possible way for the Congress or members
of the public to appraise the contribution of any member of the
Committee to the formulation of monetary policy. Such appraisals are
essential to any study of how to improve the system ... 6
Governor Robertson also answered the question of whether knowing
they were on public record would inhibit members' willingness to speak
frankly in FOMC meetings. He said, "Men competent to serve in these
positions should be willing and anxious to stand on their records and be held
responsible for the way in which they play their respective roles."
The men and women who serve on the FOMC today and those who w ill
serve in the future should not be reluctant to go on record. Each w ill be
backed up by some of the most competent economists in the world. Each one
w ill already have won distinction as a responsible professional in some
capacity before joining the Committee. I would suggest that any committee
member who is afraid his or her statements might not stand up to the tests
of time or outside view should either put more thought into the statements
or seek a less demanding line of work.




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7
A Mandate for the Federal Reserve
When considering the use of the minutes and other information from
the Federal Reserve for establishing accountability, one must ask:
Accountability for w hat? Most treatises on responsibility and
accountability in business, government, and the m ilitary stre ss the need for
a clear statement of the responsibility or m ission for which an individual or
an organization can be held accountable. Such a statement or mandate is
lacking here. After 200 years of constitutional history we still have not
clearly decided what the mandate for control of the money power is or
where it resides.
The Federal Reserve System and most other central banks pursue
multiple objectives at the same time — economic growth, employment,
price stability, interest rates, and exchange rates. Experience of many years
and many countries demonstrates that it is impossible to achieve all of the
objectives set by central banks and governments simultaneously. In
operating and in reporting to their governments and the public, It is
agonizingly difficult for the central banks to decide which objective or
objectives to stress. Consequently, there is an inflationary bias in monetary
policies of many countries that is extremely difficult to counteract
Most important, there is no simple tradeoff that would permit central
banks and governments to achieve higher real economic growth by tolerating
more inflation. Instead, a stable price level would provide the best possible
foundation for maximizing opportunities for increasing employment and
real incomes.
This Congress could cut the knot by instructing the Federal Reserve to
maintain a stable price level — zero inflation — to regulate the value of
money. That is, the Congress could tell the Federal Reserve to do something
it can do and that would have a tangible, measurable result. The Federal
Reserve could then concentrate on learning how to do that, and doing it. The
Congress could hold the Federal Reserve accountable for carrying out that
responsibility. The Congress could and should examine all information
coming from the FOMC, including the Memoranda of Discussion and the Policy
Record, to assure itself and the public that the value of money is well
regulated. The voters ultimately would hold both of these bodies
accountable for the results.




221
8

1A. James Meigs, Statement prepared for Hearings before the Committee on
Banking and Currency, House of Representatives, Ninety-Third Congress,
Part 1, September 10, 11, 12, 13, and 14, 1973, p 261.
Statem ent of Arthur F. Burns, Chairman, Board of Governors of the Federal
Reserve System, in Hearings before the Subcommittee on Domestic Monetary
Policy of the Committee on Banking, Finance and Urban Affairs, Ninety-Fifth
Congress, First Session, on H.R. 9465 and H.R. 9589, October 27, 28;
November 17, 1977, p. 56.
3These letters were published in Appendix 1 1 Compilation of Opinions
1.
Received From Prominent Business Leaders and Economic Professors on H.R.
9465 and H.R. 9589, in Hearings before the Subcommittee on Domestic
Monetary Policy of the Committee on Banking, Finance and Urban Affairs,
House of Representatives, Ninety-Fifth Congress, First Session on H.R. 9465
and H.R. 8589, October 27, 28; November 17, 1977, pp. 187-312.
4Among former members of the FOMC who cited the usefulness of the
minutes were Jeffrey M. Bucher, J. Dewey Daane, Sherman J. Maisel, and J. L.
Robertson. See Appendix III. Compilation of Opinions, Hearings before the
Subcommittee on Domestic Monetary Policy, October 27,28; November 17,
1977, pp. 187-312.
5 a . James Meigs, "Campaigning for Monetary Reform: The Federal Reserve
Bank of St. Louis in 1959 and 1960, Journal of Monetary Economics 2 (1976),
439-453.
6J. L. Robertson, letter to Stephen L. Neal, October 1, 1976. Published In
Appendix III. Compilation of Opinions, Hearings before the Subcommittee on
Domestic Monetary Policy, October 27, 28; November 17, 1977, p. 245.




222

Fixed income Management Group inc.
T u e sd a y , O c t o b e r 1 9 , 1993 .
S ta te m e n t o f R o b e r t C raven t o t h e C om m ittee o n B an king F in a n c e and
U rban A f f a i r s . U .S . H ouse o f R e p r e s e n t a t i v e s .
H e a r in g s on HR28.

I h a v e b e e n i n v i t e d by Chairm an G o n za le z t o t e s t i f y on t h e im p a c t
o f F e d e r a l R e s e r v e l e a k s on t h e f i n a n c i a l m a r k e ts . I w o u ld l i k e t o
ex p a n d my com m ents t o i n c l u d e what I f e e l t o b e a g e n e r a l l a c k o f
C e n t r a l Bank c o n t r o l o v e r m em bers' u s e o f t h e m ed ia .
I w o u ld a l s o
s u g g e s t t h a t p r o c e d u r e b e im p rov ed on d i s s e m in a t i o n o f Fed p o l i c y .
1)
L eak s o f t h e o u tco m e o f FOMC d e l i b e r a t i o n s c a u s e t u r m o i l and
e x tr e m e v o l a t i l i t y i n t h e f i n a n c i a l m a r k e ts.
As a r e s u l t , a
prem ium o f u n c e r t a i n t y i s b u i l t i n t o i n t e r e s t r a t e s . The im m ed iate
b u rd e n i s c a r r i e d b y t h e U n ite d S t a t e s t a x p a y e r b e c a u s e o f h ig h e r
a v e r a g e T r e a s u r y b o r r o w in g c o s t s . H ig h e r c o s t s a r e a l s o a s s o c i a t e d
w it h p r i v a t e d e b t o f f e r i n g s .
Two r e c e n t le a k s w i l l s e r v e as
e x a m p le s .
2)
Change i s n e e d e d i n p r o c e d u r e s u r r o u n d in g t h e r e l e a s e o f t h e
FOMC v o t e .
R e l e a s e s h o u ld im m e d ia te ly f o l l o w d e l i b e r a t i o n s .
I
w o u ld s u g g e s t t h a t p o l i c y n o t b e chan ged u n t i l t h e n e x t s c h e d u le d
m e e tin g .
3)
U nder t h e G re e n sp a n F ed , some p o l i c y m akers u s e t h e m ed ia t o
a i r t h e i r own v i e w p o i n t s , e v e n i f a t o d d s w it h c u r r e n t Fed p o l i c y
(FOMC v o t e ) .
Some p o l i c y m akers seem t o b e i n t e n t on s e l l i n g
t h e m s e lv e s t h r o u g h t h e m e d ia . S e c o n d ly , g e n e r a l com m entary i s o f t e n
i l l - i n f o r m e d and r e c k l e s s .
Such com m entary d e - s t a b i l i z e s t h e
f i n a n c i a l m a r k e ts j u s t a s much a s " l e a k s " .
T h is l o o s e ca n on
a p p r o a c h m ust b e s t o p p e d .
A lth o u g h Chairman G reensp an p l e d g e d t o
s t o p l e a k s r e l a t i n g t o FOMC d e l i b e r a t i o n s ( a f t e r some u r g in g by
t h i s C om m ittee) h e a l s o must e n f o r c e a m easure o f d i s c i p l i n e on
p o l i c y m a k e r s ' g e n e r a l u s e o f t h e m edia.

100 California Street, Suite 1245 . San Francisco, California 94111 . Phone (415) 956-3994 . Fax (415) 956-9151




223

Fixed Income Management Group Inc.

1)
The l e a k o f 5 /2 1 /9 2 , c a r r i e d on p a g e s A2 and C20 o f t h e WSJ,
b e g a n , " F e d e r a l R e s e r v e p o l i c y m ak ers d e c i d e d t h i s w eek ( 5 /1 9 )
a g a i n s t an y im m ed iate c u t i n s h o r t - t e r m r a t e s , p e o p l e f a m i l i a r w it h
t h e F e d 's d e l i b e r a t i o n s s a i d 1
*.
The A s ia e d i t i o n o f t h i s p a p e r
c a r r i e d t h e s t o r y w h il e t h e U .S . was s l e e p i n g and p r i c e s d r o p p e d
o v e r n i g h t ( i n t e r e s t r a t e s up) on E uro and U .S . T r e a s u r y d e b t , w h ich
i s t r a d e d on a 24 h o u r s b a s i s .
S h o r t r a t e s jum ped a n o t h e r 15 t o 25
b a s i s p o i n t s ( 1 /4 o f 1%) e a r l y i n t h e U .S . t r a d i n g d a y .
Bond
y i e l d s , w h ich had c l o s e d on 5 /2 0 a t 7 .7 7 % , c l o s e d 5 /2 1 a t 7 .8 6 % .
One y e a r t r e a s u r y b i l l r a t e s , w h ic h a v e r a g e d 4.07% o n 5 /2 0 ,
a v e r a g e d 4.24% on 5 /2 1 . Had y e a r b i l l s b e e n a u c t i o n e d on 5 /2 1 t h e
h i g h e r d i s c o u n t w ou ld h a v e c o s t t h e U .S . t a x p a y e r an a d d i t i o n a l
$ 2 4 ,0 0 0 ,0 0 0 (I 7 b p on an a v e r a g e s i z e o f 1 4 B ln ) d u e t o t h i s le a k
in d u c e d s p i k e in r a t e s . I t was p u r e l u c k t h a t t h e $10 b ln 30 y e a r
i s s u e a u c t io n e d 5 /7 was n o t a u c t i o n e d on 5 /2 1 . As D a v id J o n e s
s t a t e d in h is b ook , P o l i t i c s
o f M oney, The Fed U nder A la n
G r e e n sp a n . when r e f e r r i n g t o t h e t u r m o i l fr o m w hat i s known a s t h e
T h a n k s g iv in g
Day
fia s c o ,
1 1 /2 2 /8 9 :
"T h e
u n c e r ta in ty
a lm o s t
c e r t a i n l y was r e f l e c t e d i n h i g h e r a v e r a g e T r e a s u r y b o r r o w in g c o s t s
i n t h e p e r i o d im m e d ia te ly f o l l o w i n g t h e T h a n k s g iv in g f i a s c o , th a n
o t h e r w is e w ou ld h a v e b e e n t h e c a s e ” . The T h a n k s g iv in g f i a s c o was
n o t a le a k b u t a c a s e o f a Fed m is c u e (a c o m m u n ica tio n p ro b le m ) i n
t h e i r o p e n m arket o p e r a t i o n s , and i r r e s p o n s i b l e WSJ r e p o r t i n g , t h a t
l e d t h e m ark et t o b e l i e v e t h e Fed had e a s e d . The d i f f e r e n c e i s t h a t
t h e T h a n k s g iv in g Day f i a s c o was an h o n e s t Fed m is t a k e ; l e a k s a r e
n o t . The end r e s u l t , w h e th e r l e a k , o r Fed m is c u e , i s t h e sam e:
e x tr e m e and u n n e c e s s a r y m a rk et v o l a t i l i t y and u l t i m a t e l y h ig h e r
c o s t s t o th e ta x p a yer.
The l e a k o f 5 /2 4 /9 3 , was f i r s t c a r r i e d on p a g e A2 on t h e WSJ. I t
b e g a n , " F e d e r a l R e s e r v e o f f i c i a l s v o t e d t o le a n t o w a r d h i g h e r
s h o r t - t e r m r a t e s a t t h e i r c l o s e d - d o o r m e e tin g l a s t week ( 5 /1 8 )
p e o p l e f a m i l i a r w it h t h e F e d 's d e l i b e r a t i o n s s a i d " . The m a rk e ts had
a l r e a d y ta k e n a n o s e d i v e on 5 /2 1 when t h e m in u te s o f t h e M arch
m e e tin g w ere r e l e a s e d . On t h a t d a y r a t e s on s h o r t te rm d e b t jum ped
10 t o 15 b a s i s p o i n t s , and b o n d s , a f t e r f l u c t u a t i n g w i l d l y , c l o s e d
1 /2 p o i n t l o w e r .
The 5 /2 4 s t o r y was c a r r i e d f i r s t i n t h e A s ia
e d i t i o n o f t h e WSJ s o t h a t U .S . m a rk e ts f a c e d l o s s e s on i n v e n t o r i e s
o f US d e b t f i r s t t h i n g Monday m o rn in g .
A p p r o x im a t e ly 12 b l n s i x
month b i l l s w ere a u c t i o n e d on 5 /2 4 a t an a v e r a g e r a t e o f 3 .1 9 % , v s
3.10% on 5 /1 7 , f o r an ad d ed a n n u a l c o s t o f some $11 m i l l i o n .
T h is
l e a k was f o l l o w e d b y a 5 /2 7 CNBC s t o r y , p l a c e d b y a Fed s o u r c e ,
w h ich g a v e an a c t u a l t r i g g e r f o r t i g h t e n i n g . M ore v i o l e n c e i n t h e
m arket p l a c e .
R a t e s , w h ich had r e c o v e r e d som ewhat fr o m t h e 5 /2 4
le a k , flu c t u a t e d w ild ly .
A g a in , p u r e lu c k t h a t o t h e r s c h e d u le d
U .S . T r e a s u r y d e b t d i d n o t com e o n t h e s e d a y s , y e t p r i v a t e d e b t
u n d o u b t e d ly d i d . Had t h e 30 y e a r U .S . bon d i s s u e w h ic h was
a u c t i o n e d on 5 /1 3 b e e n a u c t i o n e d on 5 /2 1 o r 5 / 2 4 , t h e l e a k c o u l d
h a v e c o s t t h e t a x p a y e r an yw here fr o m .0 5 t o .1 5 o f 1% on t h e i s s u e
s i z e o f $ 8 .2 6 b l n , o r from $4 t o $12 m i l l i o n a n n u a lly f o r 30 y e a r s .

100 California Street, Suite 1245 . San Francisco, California 94111 . Phone (415) 956-3994 . Fax (415) 956-9151




224

Fixed Income Management Group Inc.

The F ed l i k e l y n e v e r e v e r in t e n d e d t o t i g h t e n , b u t i n s t e a d p l a n t e d
t h e 5 /2 4 m e ssa g e i n t h e m edia a s a way o f co m m u n ica tin g t h e i r v ie w .
T h is i s n o t a c c e p t a b l e b e h a v i o r . On 7 / 6 , s p e a k in g o f t h i s le a k t o
M arket News S e r v i c e . D a v id R e s l e r , c h i e f e c o n o m is t t o Nomura
S e c u r i t i e s i n NY, s t a t e d : "T o s e l e c t p a r t i c u l a r news o r g a n i z a t i o n s
t o d i v u l g e t h e c o n t e n t s o f t h e m e e tin g , i s c r i m i n a l and a b s o l u t e l y
im m o r a l" .
"T h e o f f e n d i n g members s h o u ld b e s u b j e c t t o i n c r e d i b l y
s e v e r e p e n a l t i e s , i n c l u d i n g b e i n g e x p e l l e d from t h e Fed R es s y s te m ,
a t a m inim u m ." I n l i g h t o f t h e F e d 's le a k t o t h e WSJ, " t h e y m ig h t
a s w e l l own Dow J o n e s s t o c k " .
2)
The s o - c a l l e d " m in u t e s " o f t h e d e l i b e r a t i o n s o f t h e FOMC a r e
n o t a c t u a l l y a c o m p l e t e r e c o r d o f t h e m e e tin g . T h is p r a c t i c e was
s t o p p e d b y A r th u r B u rn s.
The " m in u te s " a r e a summary o f t h e
d e l i b e r a t i o n s . The m in u te s s h o u ld b e is s u e d i n c o m p le t e fo r m , b u t
i t i s n o t c r i t i c a l t h e y b e r e l e a s e d im m e d ia te ly i n t h e i r e n t i r e t y .
I t i s t h e d i r e c t i v e t o t h e NY Fed w h ich s h o u ld b e r e l e a s e d
im m e d ia t e ly , o r t h e n e x t w eekd ay, d u r in g U .S . m ark et h o u r s . F or
e x a m p le , t h e " m in u t e s " f o r t h e m e e tin g o f 8 /1 7 g o on f o r som e 14
p a g e s and t h e n l e a d i n g i n t o t h e d i r e c t i v e : "A t t h e c o n c l u s i o n o f
t h e m e e t in g , t h e F e d e r a l R e s e r v e Bank o f NY was a u t h o r i z e d and
d i r e c t e d , u n t i l i n s t r u c t e d o t h e r w is e by t h e C om m ittee, t o e x e c u t e
t r a n s a c t i o n s i n t h e S ystem a c c o u n t i n a c c o r d a n c e w it h t h e f o l l o w i n g
d o m e s t i c p o l i c y d i r e c t i v e : " The d i r e c t i v e i s b r i e f , g i v i n g r e a s o n s
f o r t h e c o n s e n s u s , a c t i o n t o b e t a k e n , and t h e v o t e .
T he r e l e a s e
s h o u ld b e b y t h e way o f a p r e s s s ta te m e n t f o l l o w i n g e v e r y m e e tin g .
T h is w o u ld d o n o t h i n g t o im p in g e on Fed in d e p e n d e n c e .
M ilt o n
F ried m an h a s b e e n a f r e q u e n t p r o p o n e n t o f im m ed iate r e l e a s e . "The
w h o le t h i n g ( d e l a y ) i s a b s u r d and u n n e c e s s a r y " , h e s a i d i n a r e c e n t
in t e r v ie w .
I n a d i s c u s s i o n w it h Dr. F riedm an 1 0 /1 3 he s u p p o r t s ou r
v ie w and a l s o t h e n o t i o n o f a w eekday r e l e a s e . I n t h e w ord s o f a
p a s t F ed P r e s i d e n t , " T e l l u s i f t h e econom y i s h o t , c o l d , o r in
b e tw e e n and i f t h e d i r e c t i v e i s t o f i r m , e a s e o r d o n o t h in g , and
t h a t ' s i t u n t i l th e n e x t m e e tin g ".
C hairm an G r e e n s p a n 's r e s p o n s e t o t h i s a rg u m en t, a s g iv e n t o
R e p r e s e n t a t i v e N e a l i n 1 9 8 9 , and r e p e a t e d many t im e s s i n c e , i s t h a t
s u ch d i s c l o s u r e w o u ld i n c r e a s e m arket v o l a t i l i t y when d e c i s i o n s
d i d n 't m atch m a rk e t e x p e c t a t i o n s .
T h ere w ou ld in d e e d b e movement
on r e l e a s e d a y , b u t t h i s i s p r e f e r a b l e t o t h e p r e s e n t sy ste m w h ic h ,
a s we h a v e s e e n b y p r e v i o u s ex a m p le , i n s t i l l s f e a r and v o l a t i l i t y
i n t h e m a rk et on a week t o week b a s i s .
T h e r e i s a n o t h e r p r o b le m s u r r o u n d in g t h e d e l i b e r a t i o n s and t h e
d i r e c t i v e : in t e r -m e e t in g p o l i c y ch an ges.
Such c h a n g e s s h o u ld b e
e lim in a te d .
The Fed o f t e n c h a n g e s p o l i c y j u s t a f t e r an e c o n o m ic
r e l e a s e , o f t e n t h e n o n -fa r m p a y r o l l num ber. They d en y t h a t an y on e
number ca n t r i g g e r a p o l i c y ch a n g e and h ave s a i d t h a t t h e y m o n it o r
a w h o le r a n g e o f i n d i c a t o r s .
The l a s t t h r e e y e a r s o f e v id e n c e
s u g g e st o th e r w is e .
T h is a g a in c r e a t e s u n n e c e s s a r y m ark et

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v o l a t i l i t y s u r r o u n d in g i n d i v i d u a l r e p o r t s a s i n v e s t o r s t r y t o g a u ge
t h e F e d 's r e s p o n s e . To add t o t h e c o n f u s i o n , many o f t h e r e p o r t s
r e l e a s e d by Commerce o r BLS a r e r e v i s e d b y a l a r g e m a r g in ,
som e tim e s m ore th a n o n c e . F u r t h e r , i n t e r - m e e t i n g c h a n g e s l e a d t o
c o n f u s i o n o v e r d a i l y Fed o p e r a t i o n s (T h a n k s g iv in g d a y f i a s c o ) .
3)
The G reen sp an Fed i s a m ore d e m o c r a t ic i n s t i t u t i o n th a n t h a t
u n d e r P a u l V o l k e r . On i t s f a c e t h i s i s a d m ir a b le .
B ut a s M artha
S e e g e r s a i d , in r e f e r r i n g t o t h e F ed , "D em ocra cy i s m e s s i e r th a n
d ic ta to r s h ip ".
As a r e s u l t , d u r in g t h e p e r i o d b e tw e e n FOMC
d e l i b e r a t i o n s , we h e a r m ore th a n e v e r b e f o r e fro m i n d i v i d u a l p o l i c y
m a k e rs. T h is i s u n f o r t u n a t e .
P o l i c y m ak ers' s ta te m e n ts in th e
m edia a r e so m etim es r e c k l e s s , so m e tim e s i l l - a d v i s e d , som etim e p u r e
c h e e r l e a d i n g and som etim es l i k e l y p o l i t i c a l l y m o t iv a t e d .
A ll o f
t h i s a d d s u n n e c e s s a r y v o l a t i l i t y and c o n f u s i o n .
I n e a r l y May o f 1 9 9 2 , a t a C i v i l R i g h t s C om m ission c o n f e r e n c e in
W a sh in g to n , a c o m m is s io n e r s u g g e s t e d t o Gov L in d s e y t h a t US
m a n u fa c tu r in g was i n d e c l i n e .
G o v e r n o r L in d s e y r e s p o n d e d t h a t
m a n u fa c tu r in g was " g o i n g l i k e g a n g b u s t e r s " .
On 5 /1 3 G o v e r n o r
L in d s e y was q u o te d b y a news s e r v i c e a s s a y in g t h a t " t h e econom y i s
m ovin g a l o n g q u i t e w e l l " . ( J u s t t o add t o t h e c o n f u s i o n , on t h e
same d a y , R ic h a r d S y ro n , a v o t i n g member o f t h e FOMC and P r e s id e n t
o f t h e B o s to n F ed, was on t h e news s a y i n g t h a t t h e " r e c o v e r y c o u l d
f a l l a p a r t , b u t t h e ch a n c e o f t h a t was d e c r e a s i n g " . ) The m a r k e ts
s o l d o f f 5 /1 3 a s a r e s u l t o f w hat we f e e l was e i t h e r c h e e r l e a d i n g
(a n i n a p p r o p r i a t e u s e o f t h e o f f i c e ) , o r a t o t a l l a c k o f k n o w le d g e
o f t h e r e a l s e c t o r (F ed s t a f f ? ) .
L e t ' s lo o k a t t h e e c o n o m ic f a c t s
p r e c e d i n g t h i s s t a t e m e n t.
4 /1
4 /3
4 /1 4
4 /1 5
4 /1 7
4 /2 3
4 /2 9
4 /3 0
5 /1
5 /5
5 /7

- NAPM - S l i g h t l y h i g h e r ( 5 4 .1 v s 5 2 .4 )
- P a y r o l l - Up m o d e s t ly b u t m a n u fa c t u r in g p a y r o l l - down.
A m a jo r s u r p r i s e . A v e r y weak num ber. R a t e s plum m eted.
- R e t a i l s a l e s - down ( - . 4 v s + 1 .3 )
- I n d u s t r i a l p r o d u c t i o n - Up m o d e s t ly ( + .2 v s + .5 )
- B u ild in g p e r m it s - dow n. S t a r t s - h i g h e r .
- D u ra b le o r d e r s - up m o d e s t ly
- New homes s a l e s - Down 1 4 .8 % .
- F a c t o r y o r d e r s - Up m o d e s t ly
- NAPM - Down ( 5 1 .3 v s 5 4 .1 )
- A u to s a l e s - s lo w p a c e
- P a y r o l l - m o d e st i n c r e a s e , w it h a v e r a g e h o u r s and
e a r n in g s l o w e r . I n t e r e s t r a t e s d r o p p e d a g a in a s t h i s #
i n d i c a t e d d i s t r e s s i n t h e l a b o r m a rk e t.

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E con om ic num bers sh ow ed an ev en s lo w e r econom y i n J u n e .
D is t r ic t
Fed s u r v e y s ,
h o u s in g s t a r t s ,
NAPM, m a n u fa c tu r in g em ploym en t,
d u r a b l e o r d e r s w e r e a l l lo w e r .
F i n a l l y , t h e p a y r o l l number on 7 /2
was s h o c k i n g l y w eak , t r i g g e r i n g a n o th e r c u t in b o t h d i s c o u n t r a t e
and F F 's r a t e on t h a t d a y . T h is i s " g o i n g l i k e g a n g b u s t e r s " ? T h is
i s an econom y " d o i n g q u i t e w e l l " ?
We a r e n o t s p e a k in g a b o u t j u s t
on e p e r s o n * s o p i n i o n (n o m a tte r how i l l - i n f o r m e d ) b u t a p o l i c y
m aker w h ose com m entary i s ta k e n t o r e f l e c t t h e v ie w o f t h e FOMC.
I f t h a t ' s w h at h e was d o i n g , th e n we a r e a l l i n d e e p t r o u b l e . I f
n o t , i t was c h e e r l e a d i n g and i s an i n a p p r o p r i a t e u s e o f t h e o f f i c e .
G iv e n s u ch com m en tary , we m igh t assum e t h a t Fed s t a f f e r s a r e n o t up
t o p a r . A c c o r d i n g t o L y le G ram ley, fo r m e r r e s e a r c h d i r e c t o r a t t h e
Fed and fo r m e r F ed G o v e r n o r , t h e m a jo r p ro b le m a t t h e Fed h a s been
p o o r s t a f f su p p o rt in r e c e n t y e a r s .
"The F e d e r a l R e s e r v e s t a f f
f o r e c a s t s h a v e b e e n a b o m in a b le " , he s a i d in an i n t e r v i e w t h e week
o f 5 /1 8 /9 2 .
"T h e y s a t a l l d u r in g t h e summer o f '9 1 and d i d n 't s e e
t h e w e a k n e ss t h a t was c o m in g " .
In d e e d , t h e y h a ve b e e n d e a d wrong
on g r o w th f o r t h e l a s t t h r e e y e a r s . The WSJ le a k o f 5 /9 2 i n d i c a t e d
t h a t s t a f f e r s f e l t t h e l a b o r s i t u a t i o n was im p r o v in g , t h a t r e t a i l
s a l e s l o o k e d g o o d , t h a t h o u s in g s t a r t s w ou ld t r e n d up and t h a t le a n
i n v e n t o r i e s w o u ld s o o n le a d t o an i n c r e a s e in p r o d u c t i o n . Wrong
a g a in and t h e Fed was f o r c e d t o e a s e tw o m ore t im e s t h a t y e a r .
T h e se f o l k s n e e d t o t u r n o f f t h e main fr a m e , s t e p o u t s i d e and s n i f f
th e a ir .
(My w i f e ' s e c o n o m ic m odel c o n s i s t s o f a c a r and a ta n k o f
gas.
Her p a r k in g l o t s u r v e y s p r o v e d s u p e r i o r t o t h e F e d 's m odel
tim e and t im e a g a in i n n o t i n g consum er d i s t r e s s . )
E a r ly i n t h e d a y o f 5 / 1 4 / 9 2 , G o v ern or L in d s e y was c a r r i e d on on e o r
m ore news s e r v i c e s a s s a y in g t h a t "g r o w th o f M2 w i l l r e b o u n d " , and
w i l l "b ou n ce b a c k ".
As i s Fed p r o c e d u r e , t h e a g g r e g a t e s a r e
r e l e a s e d e v e r y T h u rsd a y (5 /1 4 ) a t 4:30PM EST.
Fed o f f i c i a l s
r e c e i v e t h e s e f i g u r e s b e f o r e r e l e a s e b u t t h e y a r e s u p p o s e d t o be
u n d e r s t r i c t e m b a rg o.
H ere we h ave a Fed G o v e rn o r s p i l l i n g t h e
beans
p re -th e
s c h e d u le d
an nouncem ent.
T h is
is
a b s o lu te ly
u n a c c e p t a b l e . I t j u s t s o happened t h a t t h e m arket was k e y e d t o t h e
5 /1 4 r e l e a s e b e c a u s e Chairm an G reenspan l e d t h e m a rk et t o b e l i e v e
t h a t M2 w ea k n e ss was t h e r e a s o n f o r t h e e a s e o f 4 / 9 / 9 2 . In f a c t , M2
was up $ 9 .8 b l n , 5 /1 4 a s o p p o s e d t o a d ro p o f $ 9 .7 b l n , 5 / 7 . An
a lm o s t p r e c i s e
" b o u n c e b a c k " . T h is i s a n o th e r ex a m p le o f an
in a p p r o p r ia t e u se o f th e o f f i c e .
The L ondon F i n a n c i a l Tim es ra n a s t o r y 1 0 /9 /9 2 w h ic h q u o te d a
" s e n i o r Fed o f f i c i a l " . T h is o f f i c i a l i n d i c a t e d t h a t t h e Fed was on
h o l d , n o t b e i n g c o n c e r n e d w it h t h e p a c e o f g r o w th .
T h is s o u r c e
c i t e d " r e l a t i v e l y s t r o n g " c a r , t r u c k and g e n e r a l r e t a i l s a l e s .
On
t h i s o c c a s i o n C hairm an G reenspan a c t u a l l y c a l l e d a s p e c i a l news
c o n f e r e n c e t o d i s t a n c e h i m s e l f (and p re su m a b ly Fed p o l i c y ) from
t h i s a r t i c l e . T oo l a t e . The harm was a l r e a d y d o n e . A n o th e r l e a k o u t

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Fixed Income Management Group inc.

o f t h e ch e a p s e a t s .
E u ros l o s t up t o 30 t i c k s in t h e m orn in g o f
1 0 /9 a s r a t e s jum ped h i g h e r .
On 1 0 /8 , y e a r b i l l s a v e r a g e d 3 .0 6 % .
On 1 0 /9 , 3.18% 1 L e t u s assum e t h a t 1 0 /9 was a u c t i o n d a y .
T w elv e
b a s i s p o i n t s ( .1 2 o f 1%) on an a v e r a g e s i z e o f $15 B ln i s $18MM
e x t r a t o t h e t a x p a y e r ( i g n o r e t h e p r i v a t e b o r r o w e r who may h a ve
b e e n u n fo r t u n a t e enough t o h a v e com e t o m ark et on 1 0 /9 ) th a n k s t o
a l a c k o f d i s c i p l i n e a t t h e F ed .
A s r e c e n t l y as 1 0 /4 o f t h i s y e a r J e r r y J o r d o n , P r e s i d e n t o f t h e
C le v e la n d Fed and s p e a k in g b e f o r e t h e O h io B a n k ers A s s o c i a t i o n ,
s a i d t h a t i t i s tim e t o t r e a t s t a t e c h a r t e r e d member i n s t i t u t i o n s
a s c l i e n t s r a t h e r th a n ,,c a p t i v e s " .
L o c a l b a n k e r s w e re m y s t i f i e d .
No o n e h a s a p ro b le m w it h an o v e r b e a r i n g F ed , a c c o r d i n g t o
re sp on ses th a t day.
O h io b a n k e r s w e re " c o n f u s e d and i r r i t a t e d " .
A Fed s t a f f e r s a i d , " I h a v e n o i d e a w h at h e i s t a l k i n g a b o u t " .
" J o r d o n o f t e n s a y s t h i n g s t h a t d o n 't r e f l e c t t h e
o p in io n o f th e
b o a r d " , s a i d Ken G u e n th e r, vp o f t h e In d e p e n d e n t B a n k ers a s s o c and
a fo r m e r a s s i s t a n t t o M i l l e r , B urns and V o l k e r . " J o r d a n 's p u b l i c
u t t e r a n c e s h a v e an noyed o t h e r c e n t r a l b a n k e r p o l i c y m akers and
c o u l d b e c o n s t r u e d a s an i n a p p r o p r i a t e u s e o f h i s o f f i c e " . (J o rd a n
h a s b e e n a s u s p e c t in p a s t FOMC l e a k s . )
On 1 0 /8 , D ept T re a s u r y S e c t R o g e r A ltm an c r i t i c i z e d t h e NY Fed f o r
comm ents by a s e n i o r o f f i c i a l t h a t w e re s e e n a s c r i t i c a l o f a
s t a t e m e n t by C l i n t o n a d m in i s t r a t i o n o f f i c i a l s on t h e Y e n /$ e x c h a n g e
ra te.
M a rg a re t G reen , a s e n i o r v i c e p r e s id e n t a t t h e NY Fed
s u g g e s t e d t h a t t h e s e comm ents may h a v e b e e n made b e c a u s e o f
"in e x p e r ie n c e ".
" I t i s n o t u n u su a l f o r som eone t o move i n t o an
e c o n o m ic p o l i c y j o b , h a v in g b e e n i n p u b l i c s e r v i c e f o r s o much o f
t h e i r c a r e e r , and answ er a q u e s t i o n w it h o u t h a v in g f u l l y t h o u g h t
th r o u g h t h e c o n s e q u e n c e s . When new p e o p l e g e t i n t o new p o s i t i o n s ,
t h e y may make su ch comm ents w it h o u t r e a l i z i n g t h a t t h e r e s t o f t h e
w o r ld i s l o o k i n g a t t h e i r com m ents a s i n d i c a t i v e o f p o l i c y " .
E x a c t ly o u r p o i n t !
I f e e l t h a t t h e m a jo r i t y o f p o l i c y m akers h a v e n o t b e e n g u i l t y o f
t h e s e o f f e n s e s and h ave t h e w isdom t o k e e p i t z ip p e d betw een
m e e t in g s .
O th e r s d o n o t .
T o q u o t e a g a in f o r t h e J o n e s b o o k ,
" ...s o m e
a m b it io u s ,
n e w -b r e e d
Fed
p o lic y
m akers
have,
in
c o m p e t it i o n w it h t h e Fed C hairm an, begu n t o e f f e c t i v e l y u s e t h e
m edia and p u b l i c r e l a t i o n s t o s e l l t h e m s e lv e s o r t h e i r own id e a s
(p e r h a p s
in
s e e k in g
r e c o g n itio n
fo r
fu tu r e
A d m in i s t r a t io n
a p p o in tm e n ts t o t h e Fed C h a irm an 1s j o b
i t s e l f o r o t h e r key
g ov ern m en t p o s i t i o n s ) " . "T h ro u g h b a ck g r o u n d p r e s s i n t e r v i e w s and
t h e in fa m o u s W ash in g ton ' l e a k ' , t h e y c a n a d v a n c e t h e i r own p o l i c y
p o s it io n s ."
T h e re must b e a r e t u r n t o d i s c i p l i n e a t t h e G reen sp an
F ed.

100 California Street, Suite 1245 . San Francisco, California 94111 . Phone (415) 956-3994 . Fax (415) 956-9151




228
F e d e r a l R e s e r v e B an k o f M in n e a p o lis

2 5 0 M a rq u ette Avenue
M in n e a p o lis , M in n e s o ta

55480

G a r y H. S t e h n
P r e s id e n t

November 8, 1993

The Honorable Stephen L. Neal
Committee on Banking, Finance
and Urban Affairs
U.S. House of Representatives
2129 Rayburn House Office Building
Washington, D.C. 20515-8050
Dear Congressman:
I was pleased to appear before the Committee on Banking, Finance and Urban
Affairs on October 19, 1993, and I appreciate the opportunity to respond to the two
questions you posed during those hearings:
1.

“[Do] you agree that price stability is the best policy for the Fed?”

2.

“[Do] you think the Fed should be held accountable for achieving and
maintaining that policy— legislation?”
via

My answer to both questions is yes— with qualifications. I am on the
but
record as favoring price stability as the objective of monetary policy. Nevertheless,
I have two concerns about legislation that makes the Federal Reserve accountable for
achieving this objective:
1.

If the Federal Reserve’s period of accountability were made too short,
monetary policy could become a destabilizing force.




229

2

2.

If Federal budget policy were not changed to be consistent with a
noninflationary environment, uncertainty about the direction of future
policy would be introduced into the markets.

My published remarks (The Conference Board’s Economic Times, September
1992) convey my support for making price stability the objective of monetary policy,
and in them I conclude
that price stability should be the paramount objective of monetary policy.
That conclusion rests on three main propositions: First, that the goal of
economic policy is to achieve sustained prosperity. Second, that the principal
contribution monetary policy can make to that goal is to establish price
stability, since our economy does not work well in an inflationary environ­
ment. And third, that inflation is ultimately a monetary phenomenon.
I further indicate in those remarks that the debate about monetary policy
centers on the second of the above propositions:
Some maintain that the benefits of price stability are small and that most
of them can be obtained by suitable indexing of taxes, compensation, and
credit agreements. This position is seriously flawed, however, because
comprehensive indexing is unlikely and at most would be a second-best
substitute for price stability.
A more serious intellectual challenge is posed by those who assert that
the goal should be a stable inflation rate rather than price stability. The
historical record argues against this position in two ways: First, for
whatever reasons, countries that abandon price stability as a goal generally
experience accelerating inflation, not a stable inflation. Second, comparisons
across countries show that over the long term lower inflation rates are
associated with stronger growth.
Some worry that too rigid a commitment to price stability could prevent
the Federal Reserve from responding appropriately to ‘shocks,’ such as a
sharp break in stock prices or other threats to the financial system. Not
so—
even large injections of liquidity are compatible with price stability if
they are temporary.
A more substantial concern is the fear that the short-term pursuit of
price stability will lead to losses of employment and output, as suggested by
the Phillips curve. If, however, the credibility of the Federal Reserve’s
commitment to price stability and its ability to attain the goal are high,
expectations about wages, prices, and interest rates are likely to moderate

8 0 - 9 4 - 9
7 3 -2 0


230
3
quickly. . . . If the Federal Reserve’s policies are credible, price stability can
be attained at acceptably low cost.
With all this support for price stability as the objective for monetary policy,
why, you might ask, do I have reservations about putting the objective explicitly into
law and holding the Federal Reserve accountable for achieving it? A careful reading
of my remarks suggests my two reservations.
First, I am concerned about the length of the time period over which the
Federal Reserve is held accountable for achieving the objective.

I stated that

“inflation is ultimately a monetary phenomenon. ” However, it is affected by many
other factors in the short run: e.g., business cycle phase, oil price shock, and bad
weather. Moreover, the best empirical research suggests changes in money affect
prices after a considerable lag—
upwards of two years. If the period of accountability
were made too short, the Federal Reserve would be forced to move wildly within the
period to offset shocks, and this could be destabilizing as the effects of the monetary
policy moves amplify over time. If the period of accountability were made too long,
in effect, there would be no accountability. So, I see this as a thorny issue.
Second, I am concerned about the coordination of monetary and budget
policies. This relates to my statement that “if the Federal Reserve’s policies are
credible, price stability can be attained at an acceptably low cost.” If the Federal
Reserve were to pursue price stability, budget policy would have to be made
consistent with that pursuit. A persistent deficit policy is not consistent with a
nonaccommodating monetary policy: interest on the debt and the total amount of
debt would continue to rise as proportions of total income. Were the two policies not
consistent, the public would have to guess how they would be changed to make them




231
4
consistent. Thus, if budget policy were not adapted to a noninflationary environment,
more uncertainty would be introduced into the marketplace. It is unlikely that the
Federal Reserve's credibility as an inflation-fighter could be maintained were budget
policy not to follow suit.
My second reservation is not so much a criticism as a recommendation, I
believe price stability should be a goal of macroeconomic policy, but I also believe
both monetary and budget policies must pursue this goal. I have enclosed our 1990
annual report, which describes one way this could be done.

Sincerely,

GHS:jf

Enclosure




232

Federal Reserve Bank of Minneapolis




1990 Annual Report

Playing by The Rules
A Proposal for Federal Budget Reform

233

Federal Reserve Bank o f Minneapolis

1990 Annual Report

Playing by The Rules
A Proposal for Federal Budget Reform
By Preston J. Miller, Vice President and Deputy Director o f Research,
and V.V. Chari, Research Officer

Contents

President’ Message
s

1

Playing by The Rules
A Proposal for Federal Budget Reform

3

Statement o f Condition

22

Earnings and Expenses

23

D irectors

24

Officers

25




The views expressed m this
annual report are solely those o f
the authors; they are not intended
to represent a formal position o f
the Federal Reserve System.

234

President’s Message

This year’ essay proposes major changes in the federal budget process. But why should
s
changes be considered now, when just last fall a major reform package was passed?
V.V. Chari and Preston Miller argue that the fall reforms provide at best a transition to
a more balanced budget; even if the reforms work, many problems will remain. The
authors persuasively argue that addressing those problems requires a more fundamen­
tal reform of the budget process than the fall reforms provide.
Some may question why the Federal Reserve, which has responsibility for mon­
etary policy, is addressing fiscal policy issues. My response is that the two policies are
intertwined. Persistent budget deficits and a rapidly growing federal debt increase the
pressures on the Federal Reserve to follow an inflationary policy
I expect some will also argue that all this talk about the budget process is small
potatoes when we know the real problem is policymakers’ inadequate attempts to
deal with the hard choice of higher taxes or major cuts in spending. No one disputes
this is a major part of the problem. This essay’ contribution is to show clearly that the
s
process also matters. Under the rule changes proposed by Chari and Miller, problems
would not be allowed to accumulate and be foisted on future generations; they would
have to be resolved within a two-year balanced budget span.
Not only do they offer a treatment for the problem, but Chari and Miller also
provide an analysis of its roots, showing that a sound framework for budget policy
decisions is currendy lacking. They go on to provide one, based on economic prin­
ciples, for their proposed set of reforms.
I hope this essay stirs discussion on the nature of the budget policy problem and
on economic principles that should be used to guide the process.




President




Federal Reserve Bank of Minneapolis

1990 Annual Report

Playing by The Rules
A Proposalfor FederalBudgetReform
By Preston J. Miller, Vice President and Deputy Director ofResearch,
and V.V. Chari Research Officer

The federal budget mess just won’t go away.Despite the discipline of GrammRudman-Hollings (GRH), the government is running ever larger budget deficits,
W p p seth ttlw
e ro o a
making poor decisions and spending an inordinate" amount of time on the process.
fe e l g v r mn c a g
d ra o e n e t h n e
In 1990 the budget deficit reached $220 billion. This year; after the torturous passage
acto n gp c e
w in ra tic s,
of a package of expenditure cuts and tax increases, itfe projected to exceed $30Q bil­
ta tftH ra so d b Issu
s ts le n e t e
lion. Yet the original GRH deficit tai^et for fiscal 1991 was zero. Vbters are coricemed;
Congress is concerned; the admmistration is concerned. Although there is wide- * a dIm o o fo o e t
n p se n n in n
spread agreement that something* seriously wrong with the budget process, there
m ch n s. O tp o o l
e a ism u r p sa
is less agreement about what should be done about it In response to this concern,
w p d ce a g tsth t
ill ro e b d e a
many proposals for reform have been suggested. Yfet they miss the marie they foil to
art b la c do ertim in
a ne v
e
address the problems inherent in the budget process and are not based on sound
a a p o r tefa e th n
n p r p ia th r a
economic principles.
^
a a b a ysense.
n r itr r
We provide a conceptual framework for budget policy Based on this framework,
we propose that the federal government change accounting practices, institute rules
on debt issue and impose enforcement mechanisms. Our proposal will produce
budgets that are balanced over time in an appropriate rather than an arbitrary sense.
Our proposal also will help inform die decision makers and the public about their
policy options and the financial consequences of those options. O f course, our pro*
posal will not cure all the ills in the budget process. Hard choices will still have to be
made.
But first a bit of history Since the late 1960s, the federal government has con­
sistently run large deficits (Figure 1), These large deficits have led to a dramatic in­
crease in the federal debt as a percentage of GNP in the 1980s (Figure 2). Interest
payments to service this debt have absorbed an increasing proportion of our national
product (Figure 3).
The debilitating consequences of a growing federal debt are well-known. Large
interest payments leave us with less to pay for education, highways, national defense
and a variety of useful causes. A growing federal debt tends to raise interest rates and
to increase pressure on the Federal Reserve System to follow inflationary policies.
This litany of ills may be familiar; nonetheless, it is alarming.
To make things worse, even though total non-defense expenditures have been
allowed to grow at double-digit rates, too little money has been allocated for capital




237

Components of the Federal Budget

Figure i

Figure 2

Net Deficit

Net Financial Liabilities

W
H
O

A -

K

A A
A A n - Ja AVl\ l
V/
A/ v y v ^ V
1

f \

V

V

S
O
40

■ V

/

\

,K
)

/
1945

70
60

20

V I

1950

J

1955

. I„

Figure 3

1960

1

1965

1

1970

1

1975

,i

19S0

Net Interest Payments

1

1985

1.

1990

ol r

1945

j

i

1950

1955

Figure 4
%of GNP in 1982 S

Sources: U.S. Department of Commerce and
Department of the Treasury

4




j

i

i

i

1965

1970

1975

i

Construction Expenditures

i

n

238

projects, such as highways, airports and sewer systems. Federal capital spending in
fiscal 1991 is projected to be roughly 2.2 percent of GNR down from 4.4 percent of
GNP in the early 1960s. Construction expenditures, which are an important com­
ponent of capital spending, have declined over the postwar period (Figure 4). Surely
we can do better than to leave our children decayed highways, crumbled bridges
and antiquated sewer systems, with little or no ability to repair or replace any of them
because of the enormous tax bills coming due for services consumed before they
were even born.
We are not the first to offer solutions: The Gramm-Rudman-Hollings Act (GRH)
and the reforms of last fall were attempts to respond to these problems. While these
attempts to reach a balanced budget are laudable, we think our proposal is better.
Specifically, we propose that the federal government adopt the following:
■ Record transactions on an accrual basis and maintain separate operating and capital
budgets,
■ Require that the combined operating budget in the current and subsequent fiscal
years be balanced, and establish overall limits on capital spending,
■ Institute enforcement mechanisms based on performance to ensure that the rules
are being followed,
■ Set up rainy day funds to meet contingencies.

W yd w n e th ss o
h o e ed e r
a yru sa all?W yn t
n le t
h o
r lyo p lic -m k rsto
e n o y ae
m g o d tia n ?
ate o d e lo a
T ep o le Isth tth
h rb m a a
p lic -m k gp c ss
o y a in ro e
Isfu d mn llyb se
n a e ta ia d
a a stth fu r . W o t
g in a tu e ith u
ru stoc ntr inp lic
le o s a o y
d cisio s, w w c n u
e n e ill o tin e
toh v b do tc m s.
ae a u o e

We would, of course, not be averse to an escape clause suspending the rules in
the event of a war or national emergency But we think that such suspension should
require a supermajority of votes in Congress and the assent of the president.
Why do we need these or any rules at all? Why not rely on policy-makers to
make good decisions? The problem is that the policy-making process is fundamen­
tally biased against the future. Without rules to constrain policy decisions, we will
continue to have bad outcomes. So the question is not whether to have rules, it is
which rules to have. The current rules do not address the bias, nor are they based on
sound economic principles. In the rest of the essay, we explain the bias in policy­
making, show that the current set of rules is inadequate and argue that our rules
will yield good outcomes.

The Need for Policy Rules
Our political system encourages elected officials to adopt policies that are biased
against the future. They are biased, because they are not what voters ideally would
like. Voters tend to have a long-term view on policy issues. They care about the
outcomes of policy decisions not only over their own lifetimes but over the life­
times of their descendants. Elected officials, however, tend to adopt a short-term
view on policy issues.
But why should this be so? If voters could keep themselves fully informed, closely
monitor decisions and understand the effects of alternative policies, surely they would
force their elected officials to act in the public’ interest. Voters would boot out officials
s




5

239

R th rth nca gD
a e a rtin m
g v m e t’s b sto
u e mir ia
e ce elyd o n th
x ssiv isc u t e
fu r , th Ga m
tu e e r m R d a -H llin sp c ss
u m n o g ro e
fe H
d .




who acted badly or develop institutional arrangements that set up proper incentives.
But voters have neither the ability nor the incentive to get the information necessary
to do these things.
It is especially difficult for voters to decide whether policy-makers are making wise
choices on decisions that will yield benefits or costs several years into the future. So
even though voters care about the future, they weight current results heavily They
rationally reward policy-makers who make decisions yielding large current benefits
even if some of those decisions impose future costs. In order to get reelected,
policy-makers have incentives to make decisions that are systematically biased against
the future. Thus, it is not especially helpful to argue that if incumbent policy-makers
were replaced, wiser policies would be chosen. The problem is that the system en­
courages policy-makers to adopt the short-term view.
This bias results in decisions weighted toward current rather than future con­
sumption. In particular, these decisions mean too much deficit financing, too little
capital investment and a proclivity to put off until tomorrow projects which should
be undertaken today. The immediate benefit to elected officials is easily seen. Deficit
financing shifts the tax burden for current consumption into the future. This allows
more consumption now but less in the future as the taxes are paid. Less capital
investment frees up resources and allows more consumption now, but since fewer
resources have been invested, there is a smaller supply of goods available for future
consumption. Elected officials can also make more resources available for current
consumption by putting off projects such as maintenance of the infrastructure or
closure of insolvent thrifts. But the problem is that such actions leave fewer resources
available in the future as the real costs of the necessary but delayed, expenditures
escalate.
This policy-making bias against the future is not unique to the government, how­
ever. Corporate stockholders face many of the same problems as voters in deciding
whether corporate managers are acting wisely. Corporate managers act on behalf of
stockholders yet they have different interests. Stockholders have incomplete knowl­
edge about the managers’ decisions and the consequences of the managers’ actions.
These are features of the so-called agency problem.
Furthermore, no single stockholder has much incentive to monitor management’
s
actions. Stockholdings are typically dispersed among many individuals. Each stock­
holder has an incentive to let other stockholders monitor the firm. As a result, typically
there is less monitoring of firms’ actions than would occur if the stockholders could
act jointly This is known as the free rider problem.
Voters also face the agency and free rider problems. It is difficult to know the con­
sequences of policy-makers’ actions and each voter has an incentive to free ride on
other voters. The agency and free rider problems can be mitigated but not entirely
solved. If stockholders cannot entirely solve these problems, certainly voters cannot
be expected to solve them completely either, since compared to corporate decisions,
government policy decisions are aimed at more diverse objectives and the responsi­
bility for them is more diffuse.

240

How stockholders attempt to manage the agency and free rider problems sug­
gests ways voters might deal with them, though. Publicly traded corporations, for
example, are required to adopt standard accounting practices (known as Generally
Accepted Accounting Principles) to inhibit inaccurate presentation of information.
Corporate charters also limit management’ discretion. We think these ideas can and
s
should be used to design better policy procedures for the federal government.
Corporations also adopt a variety of other practices to align managers’ and stock­
holders’ interests, including incentive contracts for managers, hostile takeovers and so
on. It is not apparent how, or even whether, these other practices can be transferred
to the government, so here we will stick to practices that seem readily transferable.
The agency and free rider problems point to a need for rules to limit policy­
makers’ discretion. Tb understand why we arc proposing new rules it is important to
understand what’ wrong with the old ones.
s

The Problems With the Old Rules
The Gramm-Rudmati-Mailings Process
Prior to the fall 1990 reforms, the budget process was designed to work roughly as
follows: Early in January the president would submit to Congress a budget for the
fiscal year beginning October 1. By the time Congress would adjourn in the summer
it would pass bills and a budget resolution specifying amounts to be appropriated to
discretionary spending programs and changes to be made to rules for entitlement
programs and taxes. In mid-August the Office of Management and Budget (OMB)
would determine whether the projected deficit for the upcoming fiscal year exceeded
the CRH target by more than $10 billion. If it did, automatic spending cuts would
be made according to a statutory formula to ensure that the projected deficit met the
target. Then at some point Congress would raise the debt ceiling so that there was
authority to issue additional debt to finance the projected deficit.
The GRH procedure was supposed to lead to balanced budgets and to eliminate
the government’ deficit financing bias by the use of rules. The procedure did not
s
come close to achieving its goal and the original GRH targets had to be revised several
times (Figure 5). In addition, the process led to other problems.
Rather than curbing the government’ bias to excessively discount the future, the
s
GRH process fed it. By focusing on the projected budget deficit in the approaching
fiscal year, the process encouraged deficit financing, discouraged capital spending
and made it more attractive to delay necessary expenditures.
Paradoxically, the GRH process made deficit financing easier by encouraging the
substitution of gimmicks for real actions. The gimmicks included the exchanging of
assets, time-shifting of payments, movement of expenditures off the budget and use
of unrealistic economic and technical assumptions. Selling government assets, such
as loans, for cash resulted in budget savings, even though all that occurred was the
exchange of one asset for another one of comparable value. Time-shifting created one­
time fictitious savings by taking payments scheduled for the approaching fiscal year




T eGa m u m n
h r m -R d a H llin sp c ssm d
o g ro e a e
d fic fin n in e sier
e it a c g a
b e c u a in th
y no r g g e
s b tio ofg m k
u stitu n im ic s
fo re l a tio s. T e
r a c n h
g m k In lu e th
im ic s c d d e
e c a g go assets,
x h n in l
tim -sh go p y e ts,
e iftin f a mn
m v mn o e p n itu e
oe e t f xe d rs
o th b d e a du o
ff e u g t n se f
u r a e o o ica d
n e listic c n m n
ta h ic l a m tio s.
c n e ssu p n




241
Figure 5

Gramm-Rudman: Receding Targets
(By fiscal year; in billions o f dollars)

1986

Gramm-Rudman I
(1985)
Gramm-Rudman 1
1
(1987)

1988

$221.2

Actual Deficit

1987

1989

1990

1991

$149.7

$155.1

171.9

144.0

108.0

72.0

36.0

0

144.0

136.0

100.0

64.0

1992

1993

1994

1995

$153.4 $220.4

28.0
H

Gramm-Rudman IH
(1990)

327.0

349.8

0

285.2

u

n
157.5

s
117.3

Due to bookkeeping changes, the Gramm-Rudman III deficit targets are not direcdy comparable
to those of the first two versions of the antideficit law. New accounting rules exclude the surplus
in the Social Security trust funds from the deficit calculations; that has the effect of increasing the
deficit by at least $60 billion a year. These latest targets are larger than those in the original 1990
budget deal because of pre-planned adjustments in the president’s 1992 budget.
Source: Congressional Quarterly Weekly Report,
February 9,1991, Vol. 49, No. 6, page 337

and moving them into the current fiscal year where they were simply spilt milk, or
into the following fiscal year where they were not yet subject to a sequester For
example, the government achieved savings in an approaching fiscal year by taking
payments such as employees’ pay and farm subsidies due out in late September and
delaying them until early October of the following fiscal year Then without retribu­
tion, the government was able to switch the payments back once the new fiscal year
was entered. Movement of expenditures off-budget, such as was done for die US.
Postal Service and the Resolution Trust Corporation (RTC), produced budget savings
by a stroke of the pen without doing anything real. Finally, projected deficits were
reduced by use of optimistic economic and technical assumptions that overestimated
tax revenue, underestimated interest expense and understated the costs of existing
programs.
Just how extensively were these gimmicks used? Robert Reischauer, director of
the Congressional Budget Office (CBO), notes that the amount of permanent deficit
reduction enacted in the GRH period averaged a bit less than in the pre-GRH period
of same duration: “What is different about the two periods is the reliance on one­
time savings that became a feature of the GRH period. ...In the pre-GRH period,
these gimmicks occurred so infiequendy that CBO did not lceep systematic track of
them. In the GRH era, fully half of the apparent deficit reduction has been achieved

242

by such devices” {Reischauer, 1990), Reischauer also notes that under GRH the
amount of budget savings in the president’ budget attributable to overly optimistic
s
economic and technical assumptions more than tripled.
The GRH process, combined with existing accounting practices, also made
capital spending highly susceptible to the knife. Existing accounting practices treat
spending on capital projects, such as bridges, no differently than spending on cur­
rent consumption, such as legal counseling. Yet the two are fundamentally different.
A capital project provides services in the current year as well as in the future, while
current consumption provides services only in the year in which they were pur­
chased. As a result of this difference, spending on a capital project can be preferable
to spending on current consumption yet can return less in benefits in the current
year since it also provides benefits in future years. When GRH forced budget cuts in
an approaching year, the existing accounting practice led government officials to
believe that a dollar cut from capital spending would cause less immediate loss in
benefits than would a dollar cut from current consumption. To understand better why
this is so, consider the following example.
Suppose the government has decided to build a bridge at a cost of $30 million
which is expected to provide services over 30 years worth $6.4 million per year.
Suppose the interest rate is 10 percent so that the present-value of these services is
$60 million. With the present value of the benefits at double the cost, the bridge
obviously should be built. But under the government’ accounting system, dropping
s
the project saves $30 million in costs and sacrifices only $6.4 million in benefits. In
contrast, a $30 million cut in spending on a less attractive current consumption
item, for which benefits only matched costs, would sacrifice $30 million in benefits.
Given the short-term focus of GRH, accounting exercises such as these might well
explain why capital spending was so susceptible to the knife.
In addition to capital spending, GRH made it unattractive to spend money on
other projects having short-term costs and long-term benefits. For example, the
government avoided proper maintenance of nuclear armaments plants to save money
in the short term. Because of that neglect, the cost of keeping these plants operating
has escalated and the additional cost is now estimated by the CBO to be roughly $160
billion spread over the next 40 years. Another painful example is the savings and loan
crisis. If the government had dealt with the problem when it surfaced in 1986, it would
have meant closing some insolvent thrifts at an estimated cost of $10 billion to $15
billion. But the government balked, at least in part because it didn’t want to put more
pressure on itself to abide by the GRH targets. So spending to remedy the problem
was delayed, the problem mushroomed, and the cost to the government as estimated
by the CBO and the General Accounting Office rose to over $150 billion in presentvalue terms.
The GRH process not only generated poor results, it also contributed to delays
and confusion. Without a conceptual framework, policy-makers were forced to
debate each minor budget variation as if it were a new theme.




T eGa m u fmn
h r m -R r a H llin sprom n to ly
o g
* o n
g n r te p o re lts, it
e e a d o r su
alsoc n ib te tod la s
o tr u d e y
a dc n sio . W o ta
n o fu n ith u
c n e tu lfr mw r ,
o c p a a e ok
p lic -m k rsw r fo c d
o y a e ee re
tod b tee c m o
e a a h in r
b d e v r tio as H
u g t a ia n it
wr an wth m .
ee e e e

243

The hill I99<) Ri’
forms
The government was well aware that the budget process was in need o f repair and
direction. The administration suggested numerous reforms, including instituting a
line-item veto and changing the accounting procedures for loans and guarantees. The
budget committees in both chanihers of Congress held hearings on reform, several
bills proposing reforms were introduced and the budget package that finally was
passed last fall contains important reforms of the process.
It’s too early to judge whether the fall reforms will lead to improvements in the
process, hut its not too early to argue they don’t go far enough.These reforms still fail
to provide government officials with a conceptual framework tor making decisions,
and the definition of budget deficits and the targets tor them remain arbitrary

Main Features of the Fall 1990 Budget Process Reforms

■ Rve-fear B
udgeting. Budget resolutions and necessary reconciliation hills
must project spending, revenues and deficits for five years.
* D crstiO Spending bps. Appropriations bills must stay within separate
U
lltry
caps for defense, foreign aid and domestic discretionary spending for
fiscal 1991-93; for fiscal 1994-95, the law sets overall discretionary
spending caps.
■ Enforcem A complicated set of sequesters ensures that spending stays
ent
within the caps in the bill. Essentially, these sequesters apply if the Office
of Management and Budget determines that spending will exceed the
caps. The sequesters also “look back” to offset spending increases or
revenue cuts in the prior fiscal year.
* Piy-A
s-foli-G Entitlem md R
o
ents
evenues. Bills containing increases in entitlement
or other mandatory spending or reducing revenues must be offset by
entitlement cuts or revenue increases.
■ Sc l Sc r yadDps I s r ne Social Security receipts and expenditures
oia euit n e oit nua c.
will no longer be included in budget calculations. Increased spending for
deposit insurance activities—
chiefly the savings and loan salvage
operation—will not be allowed to trigger sequesters.
* E egnie. If requested to do so by the president, Congress could enact
mr e c s
emergency appropriations, entidement increases or revenue cuts with­
out triggering sequesters.
■ H Mid Recession. A declaration of war would still cancel the sequester
hr
process. Congress could still vote to cancel the sequester process in the
event of a projected recession or measured economic growth below 1
percent for two consecutive quarters.

ID




244

The reforms make it more difficult to exceed the deficit targets, hut they also
make it easier to niise the targets (see box tor details on the reforms/. Under the new
process, there are constraints placed not only on the size of the total budget deficit as
before, but also separately on entitlements, revenues and three types o f discretionary
spending. In addition, a series of three sequesters cm be prompted by spending
overruns in the prior fiscal year. These reforms give Congress less maneuvering room
to exceed budget deficit targets. But at the same time, the reforms allow the deficit
targets to be raised for economic and technical reasons, emergencies and increased
spending on deposit insurance activities. Since the targets .ire arbitrary; the govern­
ment is highly likely to use these loopholes to continue its deficit spending ways.
The reforms also fail to resolve problems associated with the current accounting

The fall reforms of the
budget process provide a

system. I Inder the tall reforms it is still possible to achieve budget "savings" by shifting

transition to a more

payments forward into future fiscal years, although the reforms remove much of the

balanced federal budget.

incentive to shift them back to the current fiscal year. That’s because past spending

But even If they take us to

overruns could prompt a sequester and thus are no longer treated as spilt milk.

that destination, problems

However, the reforms do nothing to address the bias against capital spending. Capital
expenditures are still treated 110 differently from current expenditures.
We have argued that rules are needed to address the policy bias problem, but we

wilt remain. Without a
logical basis for their

have seen that had rules can create further problems. While the tall 1990 reforms

targets, policy-makers will

improve the origin.il CRH rules, a lot more should be done. That is why we offer our

find ways to violate them.

proposal.

Without a sound accounting

The t.ill reforms of the budget process provide a transition to a more balanced
federal budget. But even if they take us to that destination, problems will remain.

system, they will continue
to bias their decisions.

Without a logical basis for their targets, policy-makers will find ways to violate them.
Without a sound accounting system, they will continue to bias their decisions. And
without a conceptual framework, they will continue to debate ever}1budget nuance as
if it were a new problem.

The Case for Our Rules
Basic Principles
Our budget proposal is a set of reforms intended to reduce both the policy-making
bias and the confusion associated with current procedures, and its guided by tour
basic economic principles.
First, the budget should be balanced in a present-value sense without use o f the
inflation tax. This principle is based 011 an accounting identity and on a stated goal of
macroeconomic policy. The identity says that what goes out from the government
must come in, and it implies that the present value of government expenditures
cannot exceed the present value of government receipts. Since it would be inefficient
for the government to take in more than was needed, it follows that the present value
ot government expenditures should equal the present value o f government receipts. In
this equality receipts can include proceeds from the inflation tax, that is, the
depreciation caused bv inflation in the value o f government nominal liabilities.
However, based on statements in Humphrey-Hawkins legislation and congressional




ii

245

testimony ot high officials in the Feder.il Reserve, we take price stability to he a goal of
policy With zero inflation as a goal, the first principle follows.
Second, benefits should outweigh costs. This follows from the theory of econom ­
ic policy-making which requires that government officials weigh alternative programs
in terms of their economic benefits and costs to society Since the services o f programs
occur over time, the government must measure benefits and costs in expected,
present-value terms. Those benefits and costs are dated to occur when resources are
transferred in and out of the private sector.Thus, when the government hires workers,
That beneficiaries of
government programs
should pay is partly a

the economic cost occurs when the workers enter the public sector and not when the
government gets around to mailing their checks.
The third economic principle is that users pay. That beneficiaries o f government

fairness argument. It also

programs should pay is partly a fairness argument. It also has the virtue o f making it
more likely that the benefits of public programs exceed their costs, since those costs

has the virtue of making it

cannot be pushed (iff on non-involved parties. This principle suggests that borrow'ing

more likely that the

to finance current consumption is unacceptable because that method o f financing

benefits of public programs
exceed their costs, since
those costs cannot be
pushed off on non-lnvolved
parties.

pushes the costs off to future generations who do not benefit from the consumption.
In contrast, it also suggests that borrowing to finance capital spending is acceptable
since future generations will benefit from the services of that capit.il. Obviously this
principle cannot be applied across the board. By definition, income redistribution
programs, such as wdtare, cannot be financed by recipients. But some other pro­
grams, such as the national parks and the highway system, would fall squarely under
the user-pays principle. And most other programs would fall under this principle in a
general way Current services should be paid for by the current generation, And
transfers to the poor of one generation, which are designed to even the income
distribution, should be paid for by the wealthy of the same generation.
Our fourth economic principle, tax smoothing, is an implication ot studies of the
tax structure. The implication follows as long as the deaduK’ight loss, the distortions
caused by the tax anti the resources burned up in collecting it, rises disproportion­
ately with the tax rate. That is, the deadweight loss more than doubles when the tax
rate doubles, lax smoothing means that when the government has commitments to
spend in the future, it should begin taxing for them today This is true whether those
commitments are contractual, such as underfunded pensions, or non-contractual
but fairly certain to occur, such as wars or natural disasters. What this means in
practice is that its more efficient to raise taxes a little bit now and keep them there
than it is to wait ami raise them a lot when the spending takes place.
We believe that these four simple principles suggest reforms o f the budget process
which help deal with the policy bias problem. We also believe they can provide
guidance on many current budgetary issues.
Our Reforms in More Detail
Our proposal for reform is hardly radical. It is com posed ot modest changes in
accounting procedures, rules on debt issue and enforcement mechanisms. Most of
the changes are either incorporated into budget practices of corporations mid state

1
2




246
and local governments or included in other proposals tor feder.il budget reform.
The accounting changes we propose are that expenditures and receipts he
recorded on .in accrual basis and that separate accounts be maintained for operating
and capit.il items. I hese accounting changes follow directly from our cost-benefit
timing and user-pays principles. Our cost-benefit tuning principle requires that
expenditures and receipts be recorded when the activity giving rise to them occurs;
that is, they should be recorded on an accrual basis. Our user-pays principle suggests
that it is not appropriate to borrow tor operating expenses but it may be appropriate
to borrow tor capital. Therefore, it follows that separate accounts should be main­
tained tor operating and capital items.
These accounting changes aJlow the financial effects of alternative policy actions
to be more accurately represented. This facilitates official decision making and also

Our proposal for reform is
hardly radical. It is
composed of modest

makes it easier tor voters to monitor officials’ actions. Our proposals tor accounting

changes in accounting

changes are not original. They have been proposed by the General Accounting Office

procedures, rules on debt

;GAO; and they have been included in a bill introduced by Sen. Herbert Kohl of

issue and enforcement

Wisconsin. Most firms and state governments, as well as the Federal Reserve,

mechanisms. Most of the

maintain separate operating and capital accounts. The federal budget is reported on an
accrual basis in the National Income Accounts, and the budget, calculated as the

changes are either

CiAC') and we recommend, is produced by the O M R in a timely manner. Thus, all that
is new here is that we are proposing using this existing budget information as the basis

practices of corporations

tor policy deliberations and rules.

and state and local

The rule changes we propose limit the amount of debt the government can issue

incorporated into budget

governments or Included

on its operating and capital accounts. The rules follow from our principles and from

in other proposals for

our attempts to reduce the policy bias. Although they involve only minor changes to

federal budget reform.

existing rules, they provide explicit policy targets.
We propose to limit the debt that can be issued on the operating budget by requir­
ing that the combined estimated and projected budget balance be zero in the current
and subsequent fiscal years. Since the accounts would be maintained on an accrual
basis, the proposal allows operating debt to be issued temporarily when there is a
mistiming of payments mid receipts. It also could be issued temporarily when
unforeseen spending increases or revenue losses occur. However, by including the
current year's deficit in the calculation, the government would have to implement
policies to eliminate debt caused by mistakes in budget projections. This proposal is
similar to current GRH procedures and suggested balance-the-budget amendments.
What is new in our proposal is that the budget being balanced is the operating budget
and that adherence to the rule leads straightforwardly to present-value balance of the
entire budget, without inflation, as our first principle requires.
But why a two-year rule rather than a five-year rule or a month-by-month rule?
Given the nature of the policy bias against the future, a rule requiring a balanced
budget over a fairly short time frame is desirable. Otherwise, policy-makers can
continue to run deficits while claiming they will be offset by surpluses at some distant
time. However, neither spending nor tax revenues can be forecasted very accurately,
and unforeseen events do occur. Thus, if the time frame is too short, policy-makers




13

247

W p p setolim th
e ro o
it e
d b th tc nb issu d
et a a e e
o th c p l b d e b
n e a ita u g t y
r q ir gC n r sstop ss
e u in o g e
a
ab a n a a th r in
ill n u lly u o iz g
d b Issu u toasp c d
et e p
e ifie
c ilin . W ileth is mc
e g h is uh
lik c r e tp o e u e ,
e ur n r c d r s
o rc llin a p so lyto
u e g p lie n
d b Is u dtofin n e
et se
ac
c p lsp n in . T is
a ita e d g h
ma sth tth c llin
en a e e g
wu b a in e e d n
o ld e n d p n e t
c n o o c p l sp n in .
o tr l n a ita e d g

14




will continually be forced to make changes to expenditure programs or tax rates. In
our view, a two-year rule is a reasonable compromise.
We propose to limit the debt that can be issued on the capital budget by requiring
Congress to pass a bill annually authorizing debt issue up to a specified ceiling. While
this is much like current procedures, our ceiling applies only to debt issued to finance
capital spending. This means that the ceiling would be an independent control on
capital spending. It would not be redundant, required as it is now, to accommodate
the operating deficits Congress has planned. Since all capital spending would be
financed by debt issue, setting a ceiling on debt would be equivalent to setting a ceiling
on federal capital spending. This would let policy-makers better decide on a desirable
mix of private and public capital. More capital spending would be desirable as long as
the benefits of a project were at least as large as its costs. We view a ceiling on total
capital spending as desirable so that Congress as a whole can effectively force
constituencies for capital spending to compete with each other. This reduces the
incentives to spend excessively on capital equipment.
We propose to enforce the rules using approaches similar to current practices.
The rule on operating debt would be enforced with a sequester. The sequester could
be applied in a disaggregated way, as it is under current procedures. The sequester
would be triggered whenever the combined operating deficit in the current and
succeeding year exceeded some small amount—say $10 billion to match the trigger
amount under GRH. The sequester would require cuts in spending or increases in
revenue to achieve combined budget balance. Thus, if there were an unforeseen deficit
of $20 billion in the current fiscal year, the government would have to adopt policies
leading to a $20 billion surplus in the succeeding year. We would limit the amount of
deficit reduction in a sequester to 0.5 percent of GNP, which is roughly the amount of
reduction that experts testified could be implemented without causing major eco­
nomic disruptions.
The rule on capital debt would be self-enforcing. The Treasury simply would not
be authorized to issue debt above the legislated ceilings.
Our proposals so far are derived from our economic principles of present-value
balance, cost-benefit comparison and user-pays, but seem in conflict with our
tax-smoothing principle. The reason is that government spending and revenues
fluctuate due to causes that cannot be perfecdy anticipated. Wars and recessions are
as likely to occur in the future as they have in the past, but it’ hard to know when.
s
Therefore, meeting the two-year balanced budget rule would require sharp changes in
tax rates when these contingencies occur. To avoid these kinds of changes in tax
rates, we propose that rainy day funds be set up to meet contingencies. These rainy
day funds would be set apart from the operating budget. Inflows of cash into these
funds would be counted as oudays for the operating budget and outflows from these
funds would be counted as receipts. By drawing down the funds in bad times and
building them up in good times, tax rates would not have to be adjusted in conflict
with our tax-smoothing principle. Since we recognize the temptation to raid these
funds in good times, we suggest that a supermajority in Congress be required to use
these funds.

248

What Our Reforms Will Accomplish

Our reforms are intended to lessen the government’ bias to overly discount the future
s
and to remove some of the confusion that surrounds current budgetary practices. We
argue that they lessen the bias by making deficit financing more difficult, capital
spending more attractive and procrastinating more costly. We argue that they reduce
the confusion by providing a framework based on economic principles.
How do we make deficit spending more difficult? Reporting the accounts on an
accrual basis takes away the budget ‘'savings” options of selling off assets for cash and
delaying payments to government employees or program beneficiaries. Accrual
accounting records when activities take place and not when exchanges or payments
are made. Including an explicit makeup for past errors in the enforcement mechanism
reduces the incentive to use overly optimistic economic and technical assumptions.
Mistakes require painful adjustments in the upcoming year. And, as we argue later,
requiring present-value balance makes the movement of items to off-budget status less
advantageous. However, the most important contribution the proposal makes to
controlling deficits is that it provides a definition of budget deficit and specifications of
targets which are guided by economic principles and, thus, have some logical basis.
One problem with the GRH targets is that they were designed to lead to budget
balance for an arbitrary definition of the budget. There is no economic principle that
suggests the deficit should be zero when capital transactions are included in the
definition of balance. Moreover, under the GRH deficit definition there are different
targets depending on whether Social Security or the RTC are included.
Our definition and targets are not as arbitrary as those of GRH, and that should
make it harder to raise or disregard the deficit targets. They are guided by the
present-value principle. The definition makes clear that capital transactions are
excluded from the zero deficit target. Having a clearer idea of the reason for the targets
should make it easier to stay the course.
Our proposal also makes capital spending more attractive by putting it on a more
equal footing with current spending. A dollar cut from capital spending would have a
comparable effect in the current fiscal year to a dollar cut from current spending. That
is because in our proposal the operating cost of a capital asset is spread out over the life
of the asset. While the purchase price of the asset is reported in the capital budget,
only the annual depreciation and interest financing expense are reported on the
operating budget. Thus, a dollar cut from capital spending cuts current spending by
the amount of depreciation and interest. Our method spreads the cost of capital
equipment over the years it provides services, while the current method charges it all
to the current year. Our yearly charge is essentially what it would cost the government
if it rented the capital from a private party
The main difference between our method and current practices is how it treats
dollars saved on capital spending in the current year. If the government decided not to
purchase capital equipment, our method would show that the savings in current
expenses would be only depreciation and interest. According to current practices the
savings would be the cost of the capital purchase, which is much larger. As a result,




15

249
current practices make cuts in capital spending look more attractive to policy-makers
than they really are.
As is usual under standard accounting principles, we would require that the
government’ assets be carried on its books at the lesser of cost or market value. Some
s
assets of the government have an ascertainable market value such as the assets
acquired from failed savings and loans. Thus, for such assets the government would
have an incentive to provide appropriate maintenance. If the government did not
maintain such assets appropriately, their market value would fall, thereby resulting in a
larger depreciation charge and adversely affecting the government’ operating budget.
s
Even for assets without a readily ascertainable market value, such as nuclear arma­
ments plants, standard accounting practices provide better incentive for maintenance
than current practices.
Our method also requires quick action to balance the budget when circumstances
change. In this sense, under our proposal the federal government would be forced to
act like state and local governments now do. Under our proposal, difficult choices
could not be simply passed on to future Congresses and administrations.
To illustrate how our proposal and the economic principles on which it is based
could work to reduce the confusion surrounding current budgetary issues, we
examine the treatment of trust funds, the RTC, loans and guarantees and future
commitments.
The controversy over trust funds, such as Social Security, is whether they should
be on-budget or off-budget. If on-budget, their balances would be included in deficit
calculations and targets. If off-budget, they would not.
Our present-value balance principle gives some guidance on this issue. To move a
program off-budget means that the program should have an independent budget. It
should neither rely on revenue from the general budget nor should its earmarked
revenue be accessible to other programs in the budget. If it’ not independent, then it’
s
s
not truly a trust fund and it’ not truly off-budget. The question of whether Social
s
Security should be off-budget is then a question of whether its budget should be
independent of the general budget. If the answer is yes, then by the present-value
principle the Social Security budget and the general budget should be balanced
independently in a present-value sense. If the answer is no, then just the sum of the
two budgets should be balanced in present value. Within this framework, policy­
makers must first decide whether they want Social Security to have an independent
budget, and if they do, they will find their choices to be quite limited on the financing
of committed Social Security benefits. For instance, experts believe that given current
benefit schedules and tax rates the Social Security system is balanced in present-value
terms. Thus, by the present-value and tax-smoothing principles, policy-makers would
not be allowed to lower Social Security tax rates unless they also lowered the benefits.
We should also point out that our analysis of the policy bias problem suggests that
trust fund accounting can be a useful disciplinary device. Because voters lack the
information required to monitor the actions of policy-makers, it’ hard to monitor
s
whether policy-makers are following the cost-benefit principle. This monitoring

1
6




250
difficulty is particularly acute when expenditures are financed out of general tax
revenues. Beneficiaries have every reason to argue that the benefits accruing to them
are large, whether they value the services a lot or a little. Dedicated programs with
independent revenue sources that have strong safeguards against raiding the treasury
can be useful in solving the monitoring problem. From this perspective, trust funds are
not merely an accounting device; rather, they serve an important economic function.
We also recognize that trust funds can be abused. Given the bias in policy-making,
policy-makers have an incentive to postpone costs and accelerate benefits. For
example, policy-makers have an incentive to run a deficit or a smaller surplus than is
desirable on the Social Security system. The result is that future benefits must be
reduced or future taxes raised if the system is to be independently balanced. One
crude way to limit abuses of this kind is to require that trust funds not run a deficit.
The issue on RTC spending is how to split it up into on-budget and off-budget.
The RTC handles the assets and liabilities of failed thrifts. Since RTC spending relies
on general revenues, our reasoning on trust funds suggests all of it belongs on-budget.
The drive to move some of it off-budget was mainly a result of the current procedure’
s
failure to distinguish capital spending from operating expenses. What typically occurs
is that the RTC takes over a failed thrift with assets valued at, say, $700 million and
insured deposits of, say, $1 billion. The $1 billion must be paid off immediately, while
the $700 million in assets is sold gradually over a number of years. By current
methods the $1 billion is treated as a current expenditure. Then, when the assets are
sold over time, the sale receipts are treated as revenue. The pay-off to depositors is
funded by debt issue and the debt is in effect reduced when the assets are sold. The
interest is also treated as an expenditure. The current procedure clearly overstates the
deficit in the current year, since it assigns no value to the assets the government
acquires. The drive to move RTC spending off-budget was a clumsy attempt to
correct this problem.
Using our procedures, only the capital loss and interest expense would show up
on the operating budget. That budget would not be affected by the timing of asset
sales. When the RTC initially takes over the failed thrift, it would be considered a
capital purchase of $1 billion financed by debt. However, since the assets were worth
only $700 million, there would be an immediate write-off of $300 million charged to
depreciation. As with other capital purchases, there also would be an associated
interest expense. Future asset sales would affect the operating budget only to the
extent that actual sale values differed from the capital budget’ assumed market values.
s
Thus, using our procedures, RTC spending would be treated no differently from
other capita] spending.
Capital budgeting also would clarify the treatment of government loans and
guarantees. These items involve subsidies that are realized when private parties fail to
maintain payments on loans. Past budget practices have treated the government loss
of loan revenue or payment on a loan guarantee as a budget deficit increase at the time
they occur. Thus, it appears to policy-makers as a good way to give out subsidies now
and pay for them much later. Under our proposal, loans and guarantees would be




Our reforms are Intended
to lessen the government’*
bias to overly discount the
future and to remove some
of the confusion that
surrounds currant
budgetary practices.
We argue that they lessen
the bias by making deficit
financing more difficult,
capital spending more
attractive end
procrastinating more
costly.

17

251

T emind r n e
h a iffe e c
b twe o rmth da d
e en u e o n
c r e tp a tic sish wi
ur n r c e o t
tr a d lla sa e o
e ts o rs v d n
c p l sp n in inth
a ita e d g e
c r e ty a ...cu t
ur n e r. rren
p a tic smk c tsin
rc e ae a
c p lsp n in lo kmr
a ita e d g o o e
a a tiv top lic -m k r
ttr c e o y a e s
th nth yr a a e
a e e lly r .

included in the capital budget as assets and liabilities, respectively The subsidies on
loans and guarantees would show up on the operating budget at the time the loans
and guarantees were granted. Under our proposal policy-makers would be con­
fronted immediately with the costs of the subsidies. We should point out that the way
loans and guarantees affect the operating budget under our proposal is similar to how
they will affect the GRH budget following last year’ reforms.
s
Finally; our tax-smoothing principle suggests that revenue should be collected
today for future commitments. Currendy the money is not collected until after the
event occurs. Some of the commitments are contractual or explicit, such as pensions,
and for these the government might make advance payments into something like an
escrow account. Other commitments are not explicit but are fairly certain to occur in
the future, such as wars and natural disasters. For these we have proposed that the
government make advance payments into a rainy day account. The purpose of the
escrow and rainy day accounts is to provide present-value budget balance without
having to change tax rates. Assuming that the government^ capital expenditures rise
at the same rate as national income, the effect of the accounts is to lower the
government’ debt-to-income ratio over time until the commitments are realized and
s
then to allow them to rise at that time. Over long periods of time, the debt-to-income
ratio would remain constant.
The purpose of using our procedures to examine these issues is to show their
practical value. We believe they can considerably reduce the confusion surrounding
current budget practices.

Objections to Our Reforms
Since aspects of our proposal have been tossed around for some time, we can
anticipate two important objections to it. One objection is that it does not accommo­
date countercyclical policy, and the other is that our proposal would encourage
policy-makers to move everything over to the capital budget Although these objec­
tions have some validity, we believe they are not decisive. We believe the constraint on
countercyclical policy is not very costly, and we believe safeguards can be put in place
to limit misclassification of expenditures.
Consider first the loss in flexibility to conduct fiscal policy. Our proposal allows
some limited countercyclical policy, but it does not allow the government to suspend
the rules in case of a recession. The availability of a rainy day fund would, in any case,
allow for some countercyclical fiscal policy But when an unforeseen shortfall does
occur, it could be accommodated in the current year, provided it is made up for in the
succeeding year. The government would also be able to increase capital spending in a
recession when interest rates were low, because such spending then would generate
less interest expense.
• Nonetheless, our proposal is more rigid on countercyclical policy-making than
current procedures. We do not think this rigidity is very cosdy because we are
unaware of any evidence that discretionary countercyclical budget policy works.
Most studies show that lags in responding to recessions cause any stimulative effects

18




252
of fiscal policy to occur too late, well into the ensuing recovery. Furthermore, the
rigidity could be beneficial. If the decline in the growth rate of real output goes on for a
long period, perhaps there is a secular as well as a cyclical element. To the extent that
an output decline signals a long-term reduction in output growth, the government
should reduce spending.
Consider next the objection that policy-makers will want to move everything to
the capital budget. To a great extent that’ true, but we argue that now everything, in
s
effect, is treated as a capital expense. The government can borrow to finance any
expenditure. So by strictly defining what is a capital expenditure, as states have done
and as the GAO proposes for the federal government, many expenditures can be kept
off the capital budget.
Even with strict definitions, though, there will be problems with misclassifications or understating of depreciation on capital items. Some expenditures that provide
benefits in future years would be classified as current. In fact, we would favor including
most human resource programs, such as those for education, crime control and
health, on the operating budget. We do not deny that a better educated, better
protected and healthier population will make people better off in the future. We also
do not deny that requiring these expenditures to be paid in full in the current year
could lead to underfunding. It is just our judgment that the underfunding bias would
be no greater than the policy-makers’ bias to overspend on current consumption.
Thus, we judge that by stricdy limiting the capital budget to long-lived physical and
nominal assets, a small cost in terms of underfunding of some expenditures would be
more than offset: there would be a smaller bias toward overspending on current
consumption, which now is facilitated by abuse of the debt-issue option.
The government would also try to understate depreciation, as states and corpor­
ations have been known to do. It could classify some current consumption items as
capital items and assign them value, even though, in a sense, they are fully depreciated
in the current year and have no value. Or it could just overstate the value of some of its
physical or nominal assets. This is where watchdogs such as the CBO and GAO
would have to be on the alert. The logic of our proposal requires that depreciation be
accurately recorded on the operating budget. If it were not, the budget situation could
be seriously misrepresented. Understatement of asset depreciation led to the unrec­
ognized deterioration in the financial condition of many state and local governments
and various financial institutions.

Since aspects of our
proposal have been tossed
around for some time, we
can anticipate two
Important objections to It.
One objection Is that It
does not accommodate
countercyclical policy,
and tha other Is that our
proposal would encourage
policy-makers to move
everything over to tha
capital budget. Although
these objections have
some validity, we believe
they are not decisive.

Transition

How do we get from the current system to our proposed system? Some of our
reforms—
accrual accounting and separating the capital and operating budgets—
could and should be adopted for fiscal 1992. All that is required is that policy-makers
look at a different set of books. However, an immediate move to a balanced budget
would require enormous and disruptive increases in taxes or reductions in spending.
We believe the government should move to a balanced operating budget over a
three-to-five-year period. Over this period, the goal of monetary policy should be to




19

253

We believe ttw
government should move
to a balanced operating
budget over a thiee-tottve-year period. Over this
period, the goal of
monetary policy should be
to reduce the Inflation rate
gradually to zero.

reduce the inflation rate gradually to zero.
Such transition periods have been abused in the past, but we think our enforce­
ment mechanism provides a way to limit future abuses. Specifically, we propose
imposing annual limits on the operating budget deficit during the transition period.
These limits would be enforced with a sequester. If the limits are exceeded within a
given year, then the sequester would require cuts in spending or increases in revenues
in the following year. These proposals, combined with the tall 1990 reforms enacted
by Congress, would go a long way to reducing the deficit to zero over roughly a
five-year span.
It’ also possible to frontload the pain of spending reductions and tax increases to
s
a greater extent than is now mandated under the fall 1990 reforms. One major
problem with the GRH process was that large deficit reductions were supposed to
occur toward the end of the targets, and this problem persists though to a lesser extent
with the fell 1990 reforms. When the real pain of deficit reduction is postponed,
however, the temptation to revise the targets often becomes irresistible. The only
credible way around this problem is to ensure that substantial deficit reduction occurs
in the early years of the transition period.

Our Rules Are No Panacea
We would like to conclude by claiming it would be all smooth sailing if only our
proposal were accepted. But of course we know that’ not true. No change in the
s
process can make the difficult choices confronting policy-makers easy They still
would have to decide whose ox to gore by cutting spending or increasing taxes. But
we think policy-makers would make better decisions if they understood what they
were up against and what the consequences of their actions would be. No change in
budget process is going to solve the policy bias problem or keep the government out
of financial difficulty. Better budget processes than the federal government now
employs have not stopped these problems with corporations or state governments.
We nevertheless strongly believe our proposal can lessen the magnitude of the
problems.
Will our proposal work, or is a more drastic measure such as a constitutional
amendment necessary? We believe that the situation is not yet so dire as to warrant
such an extreme action. Concern over the budget is widespread enough in the nation
and among policy-makers that we feel the problems described here can be addressed
legislatively.
The budget mess will not be completely cleaned up even if all our reforms are
adopted. Hard choices will still have to be made. But we will no longer have the
choice of inflicting costs upon future generations for programs that benefit us.

20




254

Suggested Readings
On Political Economy:
A classic in the field is...
Downs, Anthony. 1957. Economic theory o f democracy. New York: Harper Press.

Other excellent readings are...
Buchanan, James and Tullock, Gordon. 1962. The calculus o f consent Ann A rbor University
of Michigan Press.
O lson, Mancur. 1971. The logic o f collective action. Cambridge, Massachusetts: Harvard
University Press.

On Agency Theories of the Firm:
Alchian, Armen A. and Demsetz, Harold. 1972. Production, information costs, and eco­
nomic organization. American Economic Review 62, pp. 777-795.
Jensen, Michael C. and Meckling, William H. 1976. Theory o f the firm: Managerial behavior,
agency costs and ownership structure. Journal o f Financial Economics 3, pp. 305-360.

On Recent Budget Policy:
Miller, Preston. 1989. Gramm-Rudman-HoUings' hold on budget policy: Losing its grip?
Federal Reserve Bank o f Minneapolis Quarterly Review 13, pp. 11-21.
Reischauer, Robert. 1990. Taxes and spending under Gramm-Rudman-HoUings. National

TaxJournal 4 3 , pp. 223-232.
Schick, Allen. 1990. The capacity to budget. Washington, D.C.: The Urban Institute Press.

On Last Fall’s Reforms:
Congressional Quarterly staff, 1990. Budget-reconciliation bill. Congressional Quarterly,
December 1, pp. 4012-4036.

On Proposed Reforms:
Bowsher, Charles A. 1988. Budget reform for the federal government. Statement before the
Committee on Governmental Affairs, US. Senate, June 7.
Budget reform proposals. 1989. Joint hearings before the Committee on Governmental Affairs
and the Committee on the Budget, US. Senate, October 18,26.

Acknowledgements
We wish to thank Rudolph tenner, Alice Rivlin, Mark Sniderman, Eugene Steuerle and John
Sturrock for useful comments on an earlier draft.




21

255
Statement of Condition (in thousands)

December 31,
199°

December 31,
1989

$ 203,000
172,000
13,228
5,495

$ 198,000
153,000
12,281
8,450

101,300
3,755,330

109,844
3,817,846

Cash Items in Process o f Collection

364,686

434,312

Bank Premises and Equipm entLess Depreciation of $33,493 and $27,704
Foreign Currencies
Other Assets
Interdistrict Settlement Fund

44,079
978,960
96,005
(188,629)

35,311
1,002,624
77,371
(405,069)

Assets
Gold Certificate Account
Special Drawing Rights
Coin
Loans to Depository Institutions
Securities:
Federal Agency Obligations
US. Government Securities

Total Assets

______ $5,545,454

$5,443,970

$3,928,662

$4,146,926

1,027,895
4,500
6,207

685,999
4,800
30,478

1,038,602

721,277

395,132
46,036

389,555
51,448

5,408,432

5,309,206

68,511
68,511

67,382
67,382

137,022

134,764

Liabilities
Federal Reserve N otes1
Deposits:
Depository Institutions
Foreign, Official Accounts
Other Deposits
Total Deposits
Deferred Credit Items
Other Liabilities
Total Liabilities

Capital Accounts
Capital Paid In
Surplus
Total Capital Accounts
Total Liabilities and Capital Accounts

'Amount is net of notes held
by the Bank of $ 769 million in
1990 and S856 million in 1989.

22




_____

_____ S 5,545,454

$5,443,970

256
Earnings and Expenses (in thousands)
For the Year Ended December 31,

1990

1989

$322,275
78,441
5,596
40,886
451

$321,299
33,152
6,173
38,513
476

447,649

399,613

32,901
7,567
1,643
5,576
429
2,041
2,328

31,024
6,648
1,382
5,285
433
1,510
2,265

Current Earnings
Interest on US. Government Securities and
Federal Agency Obligations
Interest on Foreign Currency Investments
Interest on Loans to Depository Institutions
Revenue torn Priced Services
All Other Earnings
Total Current Earnings

Current Expenses
Salaries and Other Personnel Expenses
Retirement and Other Benefits
Travel
Postage and Shipping
Communications
Software
Materials and Supplies
Building Expenses:
Real Estate Taxes
Depreciation—Bank Premises
Utilities
Rent and Other Building Expenses
Furniture and Operating Equipment:
Rentals
Depreciation and Miscellaneous Purchases
Repairs and Maintenance
Cost o f Earnings Credits
Net Costs Distributed/Received from Other FR Banks
Other Operating Expenses
Total
Reimbursed Expenses2
Net Expenses

Current Net Earnings

1Reflects a Si,424 refund of
19H9 taxes and a reduction ui
1990 taxes.
2Reimburse merits due from the
U.S. Treasury and o ther federal
agencies; $3,893 was unrcimbursed in 1990 and $1,682

Net Additions3
Less:
Assessment by Board of Governors:
Board Expenditures
Federal Reserve Currency Costs
Dividends Raid
ftayments to US. Treasury
Transferred to Surplus

(512)'
1,071
862
1,029

2,359
1,072
778
965

567
4,573
2,660
6,426
2,103
1,689

600
4,462
2,461
7,371
1,784
2,585

72,953

72,984

(811)

(2,496)

72,142

70,488

375,507
65,190

329,125
41,303

3,094
3,311
4,061
429,102

2,823
3,131
4,026
359,912

1,129

536

67,382
1,129

66,846
536

$ 68,511

$ 67,382

in 1989.
'T his item consists mamly of
unrealized net gains (losses)
related to revaluation o f assets
denom inated in breign cu rren ­
cies to market rates.

Surplus Account
Surplus, January 1
Transferred to Surplus—as above
Surplus, December 31




23

257
Directors

Federal Reserve Bank o f Minneapolis

Helena Branch

Michael W. Wright
Chairman and Federal Reserve Agent

J. Frank Gardner
Chairman

Delbert W. Johnson
Deputy Chairman

James E. Jenks
Vice Chairman

December 31,1990

Class A

Elected by Member Banks

Appointed by the Board of Governors

Rodney W. Fouberg
Chairman
Farmers & Merchants Bank & Trust Co.
Aberdeen, South Dakota

J. Frank Gardner
President
Montana Resources, Inc.
Butte, Montana

Joel S. Harris
President
Yellowstone Bank
Billings, Montana

James E. Jenks
Hogeland, Montana

James H. Hearon, HI
Chairman of the Board
and Chief Executive Officer
National City Bank
Minneapolis, Minnesota
Class B

Elected by Member Banks

Bruce C. Adams
Parmer
Triple Adams Farms
Minot, North Dakota
Duane E. Dingmann
President
Trubilt Auto Body, Inc.
Eau Claire, Wisconsin
Earl R. St.John, Jn
President
St.John Forest Products, Inc.
Spalding, Michigan
Class C

Appointed by the Board of Governors

Delbert W. Johnson
President and Chief Executive Officer
Pioneer Metal Finishing
Minneapolis, Minnesota
Gerald A. Rauenhorst
Chairman and Chief Executive Officer
Opus Corporation
Minneapolis, Minnesota
Michael W. Wright
Chairman, Chief Executive Officer and President
SuperValu Stores, Inc.
Minneapolis, Minnesota
Federal Advisory Council Member
Lloyd EJohnson
Chairman and Chief Executive Officer
Norwest Corporation
Minneapolis, Minnesota

24




Appointed by the Board of Directors
Federal Reserve Bank ofMinneapolis
Beverly D. Harris
President
Empire Federal Savings & Loan Assoc.
Livingston, Montana
Noble E Vbsburg
President and Chief Executive Officer
Pacific Hide and Fur Corporation
Great Falls, Montana
Robert H. Waller
President and Chief Executive Officer
First Interstate Bank of Billings, N.A.
Billings, Montana

258
Officers

December 3 1 ,1 9 9 0

Federal Reserve Bank o f Minneapolis
Gary H . Stem
President

R ichard L. Kuxhausen
Vice President

S. Rao Aiyagari
Research Officer

Thom as E. Kleinschmit
Assistant Vice President

Thom as E. Gainor
First Vice President

David Levy
Vice President and
Director of Public Affairs

Kent G Austinson
Supervision Officer

M arvin L. Knoff
Supervision Officer

Robert C. Brandt
Assistant Vice President

Richard W Puttin
Assistant Vice President

Jam es U Brooks
Assistant Vice President

Susan K. Rossbach
Assistant General Counsel

Marilyn L. Brown
Assistant General Auditor

Thom as M . Supel
Assistant Vice President

Vkradarajan V. Chari
Research Officer

Claudia S. Swendseid
Assistant Vice President

Lawrence J. Christiano
Research Officer

Robert E. Teetshom
Supervision Officer

Scott H. Dake
Assistant Vice President

Kenneth C T h e ise n
Assistant Vice President

James T. Deusterhoff
Assistant Vice President

Thom as H . Turner
Assistant Vice President

Kathleen J. Balkman
Vice President

Richard K. Einan
Assistant Vice President
and Community Affairs Officer

Carolyn A. Verret
Assistant Vice President

John H . Boyd
Senior Research Officer

Jean C. Garrick
Assistant Vice President

Phil C. G erber
Vice President

Peter J. Gavin
Assistant Vice President

Caryl W. Hayward
Vice President

Karen L. Grandstrand
Assistant Vice President

Bruce H . Johnson
Vice President

James H . Hammill
Credit and
Corporate Affairs Officer

Melvin L. Burstein
Senior Vice President
and General Counsel

Jam es M . Lyon
Vice President

Leonard W. Femelius
Senior Vice President

Susan J. M anchester
Vice President

Ronald E. Kaatz
Senior Vice President

Preston J. Miller
Vice President and
Deputy Director of Research

A rthur J. Rolnick
Senior Vice President
and Director of Research
C olleen K. Strand
Senior Vice President and
Chief Financial Officer
Sheldon L. Azine
Vice President
and Deputy General Counsel

Charles L. Shromoff
General Auditor
T heodore E. Umhoefei; Jc
Vice President
W arren E. W eber
Senior Research Officer

William B. Holm
Assistant Vice President

Helena Branch

Ronald O . Hostad
Assistant Vice President

John D. Johnson
Vice President and Branch Manager
Samuel H . Gane
Assistant Vice President




O

M ildred E Williams
Assistant Vice President
William G . W urster
Assistant Vice President