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January 30, 2006
What does a more transparent and democratic Fed mean for Mr. Bernanke?
The Wall Street Jounal's Greg Ip has the insight to ask this important question. (Subscription required)
Though a highly respected economist, Mr. Bernanke won't initially command the deference that Alan Greenspan earned during more than 18 years as chairman. With his colleagues expecting to contribute more, Mr. Bernanke may face a delicate tradeoff when they disagree. He might compromise, which could damp his influence over the Fed's message. Or he could decide to impose his views, which could provoke dissents and raise questions about his authority.
Fed officials say the increase in internal democracy is both inevitable and constructive, and has led to more collegial policy making. The Fed's tradition of deciding by consensus is well entrenched, they say. Some officials say an increase in formal dissents would even be healthy. At turning points in the economy, they could reveal honest disagreements among officials on difficult questions.
...
An early glimpse of this democracy in action unfolded late last year in the run up to the Fed's Dec. 13 policy meeting. Virtually all Wall Street economists expected the Fed to raise interest rates by a quarter of a percentage point. Still unclear, however, was whether the Fed would signal a change in the future course of rates.
For FOMC members, most of the suspense ended long before they gathered around a huge conference table at Fed headquarters in Washington, D.C., according to people familiar with the process. About a week earlier, the five Fed governors and 12 regional reserve bank presidents who participate in committee decisions had received three drafts of the statement from the Fed's staff.
A debate ensued, these people say. Several presidents circulated extensive comments via encrypted email. By the day of the meeting, the FOMC had largely agreed on what the statement should say. The key point: it would no longer call interest rates "accommodative" -- a broad hint that rate increases could soon come to a halt.
I have to say that I'm not that surprised that these discussions are taking place. In order to get the statement out right after the meeting (and the minutes out after only 3 weeks--more on that in the article) there would have to be pre-meeting discussion or people are going to feel like they are not part of the process. Bernanke will need to manage that process in a way that no other new chairman has. Things were a lot different when Greenspan came on board in 1987.
There's a lot more in the article, including how Alan Greenspan managed dissent over his 18+ years at the helm. There is some interesting discussion of the changing role of the reserve banks and their presidents over the years as well. This is definitely a good read to start out your week on the eve of Greenspan's last FOMC meeting.
Posted by William Polley at January 30, 2006 12:01 AM
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