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That Mysterious FOMC
The Economic Club of Memphis
Memphis, Tennessee
December 3, 1998


he FOMC is one of the most closely
watched institutions in the United
States, and indeed in the world. Articles
on monetary policy or the FOMC members appear in the Wall Street Journal almost
every day. Other newspapers also report on monetary policy issues several times a week. Yet, as
I talk with people about the FOMC, I find that
they often regard the institution as somewhat
mysterious. My purpose tonight is to dispel the
I will address six questions. How are the Fed
and the FOMC organized? Where do these folks
come from? What happens at an FOMC meeting?
Does the FOMC know more than anyone else?
How does the FOMC spread the word? Finally,
is the FOMC really that mysterious? After I finish,
I hope you will pose additional questions.

The Federal Reserve System consists of the
Board of Governors in Washington, D.C., and 12
Federal Reserve Banks. The seven Board members
serve 14-year terms. A member is permitted to
serve only one complete term; however, a member
serving a partial term may be reappointed and may
then serve a full 14-year term. Board members
are appointed by the President of the United
States and confirmed by the Senate. The President
designates one of the seven members of the Board
as the chairman for a four-year term and also
names a vice chairman. Both designations are
confirmed by the Senate.

Reserve Bank presidents are appointed
through a different process. Each of the 12 Reserve
Banks has a board of directors with powers similar
to those of a regular corporate board. Each board
of directors has the power and responsibility to
appoint the president of its Reserve Bank, although
the appointment is subject to confirmation by
the Board of Governors. First vice presidents of
Reserve Banks are backups for presidents at FOMC
meetings, and are similarly chosen. Let me explain
the process by recounting my own appointment.
Sometime during the fall of last year, my
predecessor, Tom Melzer, informed the St. Louis
board of directors that he intended to leave the
Bank by the end of January 1998. The board
selected a search committee, which followed a
process similar to that followed by any large corporation. The search committee considered a
wide range of candidates. When I was contacted
about my possible interest in early December of
last year, I consulted with my wife and decided
that I was indeed interested in throwing my hat
into the ring. After several rounds of interviews—
including a day of interviews in Washington
with each member of the Board of Governors—
the St. Louis board of directors selected me as
president, subject to approval by the Board of
Governors in Washington. The Board of Governors
approved my appointment as the president of
the Federal Reserve Bank of St. Louis last March.
Normally, each Reserve Bank president is
appointed to a five-year term. In my case, I was
appointed to the remaining four years of the term
that President Melzer had begun. In practice,
Reserve Bank presidents are ordinarily reappointed at the completion of a five-year term,


with no limitation on the number of terms. The
board of directors has the power, as does any corporate board, to dismiss the president at any time.
The Federal Open Market Committee is the
main monetary policymaking body of the Federal
Reserve System. The FOMC consists of the seven
members of the Board of Governors and five of
the 12 Reserve Bank presidents. The president of
the Federal Reserve Bank of New York is always
a voting member, and the other 11 presidents vote
on a rotating basis. For example, the Federal
Reserve Banks of St. Louis, Atlanta and Dallas
are in one of the rotation groups. This year was
the turn for the St. Louis Fed president to vote,
which means that I have been a voting FOMC
member. My final vote this year will be cast in a
couple of weeks at the December FOMC meeting.
Although only five of the 12 Reserve Bank
presidents are voting members at any given time,
all 12 presidents attend every FOMC meeting and
participate fully in the discussion and debate.
Thus, influence over monetary policy through
analysis and argumentation is available to every
Reserve Bank president at every meeting.

I have outlined the appointment process for
members of the Board of Governors and Reserve
Bank presidents. Their professional backgrounds
vary widely. Most—although certainly not all—
have Ph.D.s in economics. Some, like myself,
have academic backgrounds. Others come from
the banking industry, and some from nonbanking
lines of business. Still others have worked their
way up through the ranks of the Federal Reserve
System or served in government positions. If you
are interested in the backgrounds of the current
FOMC members, you can find their bios at the
web site maintained by the Board of Governors
The diversity of backgrounds on the FOMC
is a source of great strength for making monetary
policy. Successes in monetary policy depend on
collating a wide range of information and making

proper use of a wide range of analyses. The current
FOMC includes some members who as academics
have spent their careers studying monetary economics. Several other members with Ph.D.s have
spent many years in the banking industry as market analysts and Fed watchers. Others have less
experience with monitoring and studying Federal
Reserve policy, but their business backgrounds
bring a tremendous depth of knowledge that an
academic Ph.D., such as myself, may not have.
Still others with backgrounds in public service
bring detailed knowledge of government and fiscal
issues to the table.
In sum, I must say that I have an extraordinarily gifted group of colleagues. They are remarkable
both in the knowledge they bring to monetary
policy debates and in the high quality of analysis
they provide. I believe that the appointment
processes for the Board of Governors and the
Reserve Bank presidencies have over time yielded
a stronger and stronger set of individuals on the

The FOMC meets eight times a year, or about
every six weeks. Each of us arrives at the meeting
with a thorough briefing by our own staff and a
large pile of briefing material put together by the
staff at the Board of Governors. The Chairman
calls the meeting to order promptly at 9 a.m. The
first item of business is approval of the minutes
of the previous meeting. Next comes a review of
domestic and international market operations by
the manager of the Open Market “Desk” at the
Federal Reserve Bank of New York. The Open
Market Desk is the operating arm of the FOMC;
the Desk implements FOMC policy decisions by
buying and selling government securities. After
reporting on open market operations, the manager
usually answers questions from around the table.
Following the Desk manager’s report, a senior
Board staff member provides an overview of the
state of the economy and the staff’s best “guess”
on the economic forecast. I say “guess” because

That Mysterious FOMC

forecasting is an imperfect art. Every forecast has
a range of uncertainty around it, and on some
occasions the uncertainties are quite substantial.
The staff presentation is followed by additional
discussion with questions and comments from
the FOMC members and replies by staff experts.
Next comes a go-around in which each
Reserve Bank president and each member of the
Board of Governors provides a summary of his or
her views on the state of the economy. Presidents
typically provide information on economic conditions in their own Districts, commenting on
special considerations that might bear on the
national outlook.
Following the review of economic conditions
is another go-around, this time on the policy outlook. Chairman Greenspan kicks off the policy
discussion by detailing his interpretation of what
the statistical data mean for the economic outlook.
He wraps up this discussion by indicating his
view on policy and making clear his recommendation as to what action, if any, the FOMC should
take. The presidents and Board members then
outline the major policy considerations as they
see them and indicate the policy stance they think
is appropriate at the time. In recent years, the
policy decision has focused on the intended level,
or target, for the federal funds rate.
Finally, the Chairman has the FOMC secretary
call the roll of the voting members and each votes
“yes” or “no” on the policy directive. The policy
directive, when adopted by majority vote, then
provides the instructions for the Open Market
Desk at the Federal Reserve Bank of New York
until the next FOMC meeting.
When the meeting ends, typically around
2 p.m., the Committee releases a short written
statement to the press. Current practice is to provide a brief explanation for any change in the
target for the federal funds rate. When the Committee votes to keep the target rate unchanged, a
representative of the Committee simply makes an
oral statement to the press. This statement says
that the meeting has ended and there will be no
announcement. Stories about the policy action,
or lack thereof, quickly appear on the wire services, and the market responds that very afternoon.

I have emphasized that the FOMC is a group
of highly qualified people. However, it is fair to
say that most of the information upon which the
FOMC acts is generally available to all analysts,
both inside and outside the government. Systematic economic data, such as the unemployment
rate, employment, housing starts, GDP and so
forth, are all available to any interested observer.
The FOMC as a body does not obtain this information ahead of the world at large, although the
Chairman gets some information a few hours
ahead of the rest of us. For example, the Bureau of
Labor Statistics releases the unemployment rate
for a particular month on the first Friday of the
following month. The release time is 8:30 a.m.
ET. The afternoon before the release—ordinarily
late in the day—the BLS notifies the chairman of
the Council of Economic Advisers. The CEA
chairman then writes a short memo with the
information to the President of the United States,
the secretary of the Treasury and the Federal
Reserve Board Chairman. Thus, the Fed Chairman
receives the information approximately 12 to 15
hours ahead of the official release.
The Federal Reserve does have a large and
talented staff that is unmatched in the private
sector. If the Fed has an information advantage,
it is because the staff is able to conduct thorough
analyses of all the available data and distill from
them a better understanding of the current state
of the economy and its probable evolution over
coming quarters. Still, I believe that it is correct
to say that the Federal Reserve operates on essentially the same information base as outside
experts. In fact, careful study of the accuracy of
Federal Reserve economic forecasts suggests that
these forecasts are not notably more accurate than
those of leading commercial forecasters.
It is also worth noting that the debates within
the Federal Reserve are essentially the same as
the debates among policy experts outside the Fed.
Given that everyone has essentially the same
information, has studied the same theories and
read the same articles in the professional journals,


and has observed the same events in the markets,
it is to be expected that the debates inside and
outside the Fed are largely the same. Although
FOMC members do not talk about a meeting with
those who do not have FOMC clearance, it is
always a safe guess that the debates on the inside
are largely the same as those on the outside. Anyone who follows the Wall Street Journal, New York
Times, Washington Post, as well as various market
newsletters, will have a very good sense as to
what a given policy debate is about.

As already noted, the FOMC issues a brief
statement at the conclusion of each FOMC meeting. Two days after a meeting, the Committee
releases minutes of the previous meeting. For
example, after the November 17 meeting, the
Committee released a brief statement reporting
both that it had voted to reduce the target for the
federal funds rate to 4¾ percent and why it had
done so. Two days later, on November 19, the
Committee released the minutes of its previous
meeting, which was held on September 29, and
a report on its October 15 conference call. These
minutes do not attribute particular positions to
named individuals, but they do provide an accurate sense of the nature of the debate at the
meeting. Any information obtained under an
understanding of confidentiality is not disclosed.
Such information can come to the FOMC from
various business sources or from foreign governments or foreign central banks.
The FOMC releases verbatim transcripts of
its meetings on a five-year lag. The transcripts
identify speakers by name. The only information
omitted from these transcripts is that obtained
under a pledge or practice of confidentiality.
Anyone who believes that the FOMC is mysterious should pick up one of these annual volumes
for bedtime reading. I will guarantee that if you
read 10 years of these transcripts—or maybe just
one of them—all of the mystery will be gone!
Beyond the minutes and transcripts, the
Federal Reserve spreads information on its pol4

icy in numerous ways. The most formal of these
are the February and June congressional hearings on monetary policy at which the Chairman
reports to Congress. Member of the Board of
Governors also testify at other hearings on monetary policy and a variety of other subjects. Their
formal statements and the question and answer
periods convey a great deal of information about
monetary policy. In addition, Board members
and Reserve Bank presidents give numerous
speeches and meet routinely with bankers, business people and community groups, among others.
Federal Reserve publications and web sites provide another source of information. Anyone who
has a serious interest in monetary policy can find
an ample amount of material—written for people
of all educational levels.
For example, in October I gave four speeches—
on similar subjects, but to different audiences.
On October 2, I spoke to 65 high school students
about the importance of studying economics. Later
in the month, when I spoke to business leaders
in St. Louis and then in Louisville, I presented
my view about what had happened in the credit
markets since mid-August and how those events
might impact the U.S. economy over the long
run. In October, I also spoke in Washington at a
research conference sponsored by CATO. That
speech was a scholarly discussion of why I believe
an inflation rate of zero is better than moderate
inflation. The news media were invited to all
these events and three of the speeches are available on the St. Louis Fed’s web site.
By the way, if you have not viewed our web
site, I suggest you check it out. I think you will
find it is rich with valuable information. And the
St. Louis site isn’t unique among Reserve Banks.
All the Reserve Banks and their presidents, as
well as the Board of Governors, are committed to
making information easily available.

Over the years I have known many FOMC
members. I can tell you that they are highly qual-

That Mysterious FOMC

ified and also quite approachable and accessible.
The “mystery” about the FOMC, I think, comes
from the importance of its responsibilities and
the complexity of monetary issues. Monetary
policy is indeed complicated, as is nuclear
physics. I find nuclear physics puzzling, or mysterious, simply because I don’t understand much
about it. Monetary policy is not inherently mysterious, anymore than is any other subject. But it
does take a concerted effort and accumulation of
knowledge over time to understand what the
monetary policy debates are all about.
One of the enjoyable things about this subject
matter is that it is possible to go far into it without
being a trained economist. And it is also true that
a person such as myself who has been following
monetary policy and macroeconomics for the
whole of his or her professional career can still
find endless fascination with the subject. There
is much that we do not know, and the economic
world is constantly tossing surprises at us. I feel
truly fortunate to be so intimately involved in
this responsibility, being paid for something that
is so exciting and so much fun to me.
As I close my remarks today, I hope I am leaving you with a positive impression of an FOMC
that is very capable and highly committed. I also
hope you sense my own personal enthusiasm and
energy. All of us in the Fed are aware that exercising the power to print money is one of the most
important responsibilities in our society. Indeed,
given the central role of the United States in the
world economy, U.S. monetary policy is one of
the most important responsibilities in the world.
I will not try to tell you that the Fed is infallible.
We are not omniscient and our forecasts are not
always accurate. We are humans and we do make
mistakes. But I will tell you that I and my colleagues share a total commitment to pursuing the
most sound monetary policy we know—one that
will maintain a low and stable rate of inflation
and foster safe, reliable and efficient banking and
payments systems. That is our commitment, and
we work hard at it.