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Federal Reserve documents 9 page

On October 24, President Bush, Greenspan, and I walked into the Oval Office to the clicking of cameras. Anna, Joel, and Alyssa were already seated, almost obscured by the reporters and their cameras and boom microphones. The president announced the nomination. When my turn came, I thanked the president and Chairman Green-span, who I said had “set the standard for excellence in economic policymaking.” In a hint of my hope to introduce inflation targeting and to increase Fed transparency, I said that best practices in monetary policy had evolved during the Greenspan years and would continue to evolve. But I also said that my first priority would be to maintain continuity with Greenspan’s policies. Implicitly, I was promising to continue the gradual increase in interest rates that he had begun in June 2004.

The whole thing took less than eight minutes.

 

 

ONCE AGAIN I went through the vetting process, including even more extensive questioning by the FBI. On November 15, 2005, for the fourth time in three and a half years, I went before the Senate Banking Committee for a nomination hearing. My reception was warm and I was approved by the full Senate, with only Senator Bunning registering his opposition. The Senate not being known for haste, however, the confirmation vote came on the last day of Greenspan’s term, January 31.

 

On the next day, February 1, 2006, in the boardroom, I became the fourteenth chairman of the Federal Reserve when I was quietly sworn in by Vice Chairman Roger Ferguson in the presence of a few


governors and staff. There would be a formal swearing-in ceremony as well, on February 6 in the two-story atrium of the Eccles Building. In addition to family members, Alan Greenspan, Paul Volcker, and President Bush attended. It was only the second time that a president had visited the Federal Reserve since the dedication of the building by Franklin D. Roosevelt in 1937.

 

After Roger swore me in, I moved my books and papers into the chairman’s high-ceilinged office, lighted by an elegant central chandelier. In an early organizational meeting, a staff group organized by senior adviser Lynn Fox showed up in my office, all wearing tan socks in a reprise of the joke Keith Hennessey and I had played on President Bush. My new desk was a nineteenth-century antique donated by the late John LaWare, a former Board member. Computer screens, a Bloomberg terminal, and a television screen would soon surround the scarred wooden desk, giving my work area the ambience of a cockpit. Built-in bookcases held my small library, including many books brought from my office at Princeton, such as Bagehot’s Lombard Street. At one end of the room, an American flag and a flag bearing the Federal Reserve’s symbolic eagle flanked a fireplace. Two tall windows looked out over a manicured lawn toward the National Mall. Next to the fireplace, a door led into the reception area, where Rita Proctor was already organizing the files.

 

Unlike my predecessor, I intended to use email. To avoid being deluged, I needed a pseudonym. Andy Jester, an IT specialist for the Board, suggested Edward Quince. He had noticed the word “Quince” on a software box and thought “Edward” had a nice ring. It seemed fine to me, so Edward Quince it was. The Board phone book listed him as a member of the security team. The pseudonym remained confidential while I was chairman. Whenever we released my emails—at congressional request or under the Freedom of Information Act, for example—we blacked out the name.



 

As I settled in, the first substantive issue I tackled was the Fed’s capacity to respond to a financial emergency. Even before being sworn in, I had met with senior staff members to discuss our contingency plans. Led by Roger Ferguson and Don Kohn, the Board staff had since 9/11 considerably improved the Fed’s readiness to deal with a crisis. I was determined to build on that work. I asked for daily reports on developments at major financial firms and, after the staff started providing them, I carried them on a flash drive on my key ring.

 

Following up on my earlier idea that the Fed should prepare a financial stability report, I also named a committee of senior staff members to make periodic presentations to the Board about potential concerns in the financial system. Similar work was going on under Tim Geithner at the New York Fed. However, the resources committed to these efforts were modest and the effect on policy choices was ultimately limited.

 

From the start I also focused on the political aspects of the job. Working with the Board’s legislative affairs office, headed at the time by Win Hambley, I began inviting key members of Congress to the Fed for breakfast or lunch. We focused first on members of the Fed’s oversight committees—the Senate Banking Committee and the House Financial Services Committee—but our outreach was wide and


bipartisan. My first meeting, only two weeks after being sworn in, was with Representative Barney Frank of Massachusetts, the senior Democrat on House Financial Services. I also frequently met members in their offices or briefed an entire committee in private. I learned a lot about the ongoing debates in Congress, particularly on budgetary matters and financial regulation, and became more familiar with the legislative process.

 

Building ties to Congress would take work, but my relationships with people at the White House were already good. Over the next few years I would lunch periodically with the president, the vice president, and various advisers in the small dining room off the Oval Office. Following Greenspan’s practice, I also shared a weekly breakfast or lunch with the Treasury secretary. When I began, that was the good-humored and expansive John Snow, a former railroad executive. In addition, the full Board met for an informal lunch once a month with the Council of Economic Advisers. Eddie Lazear, a labor economist I knew from my time at Stanford, would succeed me as CEA chair. I would also meet occasionally with Al Hubbard and Keith Hennessey—who would later succeed Hubbard as NEC director—and others in the administration. They included my “neighbor” Secretary of State Condoleezza Rice, whose building was next to the Fed’s. We shared common experiences as Stanford faculty members and had both served in the Bush White House.

 

Another early priority was forging cordial working relationships with international policymakers. I already knew Mervyn King, the governor of the Bank of England. We had shared an office at MIT in 1983, when we were both visiting professors there. We had a pleasant reunion over lunch at the Fed in late March. Little had we known, as relatively junior faculty members, that we would each have responsibility for one of the world’s most important currencies. In April, I had my first one-on-one encounters with Bank of Japan governor Toshihiko Fukui, European Central Bank president Jean-Claude Trichet, and Bank of Mexico governor Guillermo Ortiz when they were in Washington for the spring meeting of the International Monetary Fund, located a few blocks from the Board.

 

International meetings, especially with my fellow central bankers, would occupy a substantial part of my time as chairman. We gathered a half-dozen times a year at the Bank for International Settlements. (The Fed chairman and vice chairman generally attended alternate meetings.) Located in Basel, Switzerland, the BIS was created in 1930 to help manage Germany’s World War I reparations payments. When the effort to force reparations collapsed, the BIS repurposed itself as a bank for central banks (investing reserves, for example) and as a place where central bankers could gather to discuss issues of common interest. After a day of formal meetings on the global economy, monetary policy, and financial regulation, we repaired to the BIS dining room for long, frank conversations over gourmet four-course dinners (each course with its own wine). For generations, the world’s central bankers have formed a sort of club, of which I was now a member.

 

When I wasn’t lunching with the secretary of the Treasury, a member of Congress, or an international official, I ate in the Board’s cafeteria, waiting in line with my tray and sitting at a table wherever I could


find an open seat, as I always had as a governor. I was now the chairman, but I thought it was important to continue to hear from staff members at all levels. For exercise, I worked out on a rowing machine and with weights or shot baskets in the Board’s small gym a couple times a week, as I had as a governor. The basketball court was a converted squash court. A two-on-two game was the largest it could accommodate.

 

 

MY RETURN TO the Board reunited me with Michelle Smith, head of the Public Affairs office, with whom I had worked as a governor. A charming Texan, Michelle had advised three Treasury secretaries—Lloyd Bentsen (who had given her her first job in Washington), Robert Rubin, and Larry Summers; then Alan Greenspan—and now me. She had cut her teeth on media relations, at which she excelled, but during my tenure she also served as a chief of staff, helping to manage my schedule and public appearances. Sociable and outgoing, Michelle always knew if a governor was unhappy with an assignment or a staff member had a personal problem, and I would count on her to fill me in when I needed to know.

 

Michelle and I planned numerous public speeches during my first year, as well as visits to the twelve regional Reserve Banks. I would actually make it to eleven. I had to cancel my visit to the Atlanta bank to attend an economic summit in China in December. For my first speech as chairman, on February 24, I returned to Princeton and spoke to an audience of faculty and students. To strengthen my credibility as an inflation fighter and dispel the Helicopter Ben nonsense, I focused on the economic benefits of low inflation—an easy topic for a central banker. As I had as a governor, I would continue to spend a lot of time on preparing speeches—in central banking, speeches aren’t just about policy, they are policy tools— but, with more limited time, I relied much more on staff for first drafts and revisions.

 

I also prepared for the required semiannual testimony to Congress just two weeks after my swearing-in. The staff sent me thick notebooks of briefing materials on every area of Fed responsibility. I knew I would also get questions on issues outside the Fed’s immediate purview. Responding to them could be tricky. I met with staff to discuss potential answers. Washington policymakers typically prepare for hearings through “murder boards,” in which staff members pretend to be lawmakers and the policymaker practices his or her answers. I disliked such playacting and preferred a straightforward conversation. I already knew from my experience with Congress that lawmakers often asked leading questions intended to elicit support for some favorite policy proposal. Many of them were lawyers, so it was inevitable that they would ask questions for all sorts of purposes, but rarely because they were curious about the answer.

 

Greenspan had gotten himself in trouble in 2001 by seeming to endorse tax cuts proposed by the incoming Bush administration. In testimony, he had said that cutting taxes was preferable to accumulating large budget surpluses, which were forecast at the time. Greenspan did not go so far as to endorse the administration’s specific proposals, but his many qualifications were soon forgotten. In early meetings with me, Harry Reid, the Democratic leader in the Senate, would refer with some bitterness to Greenspan’s supposed endorsement of the tax cuts. Reid’s message was clear enough: I should keep my


nose out of fiscal affairs.

 

I couldn’t sensibly discuss the economy while ignoring fiscal policy, so I decided to talk about fiscal issues in very broad terms—for example, emphasizing the need for a reasonable balance of taxes and spending, but saying it was up to Congress and the administration to determine how to achieve that balance. I would sometimes cite the “law of arithmetic,” meaning that, by definition, the government’s budget deficit equals spending minus revenue. Members of Congress sometimes spoke as if it were possible to increase spending, cut tax revenue, and reduce the deficit all at once—a mathematical impossibility.

 

In appointing me, the Bush White House had obviously focused on my background in macroeconomics and monetary policy and chosen to overlook my lack of practical experience as a bank supervisor. Experienced Board members were serving on the bank supervision committee, but I took the responsibility seriously and asked the Board’s supervisory staff to brief me regularly. I had a lot to learn. Early on, I met with fellow regulators like Marty Gruenberg, then serving as acting chairman of the Federal Deposit Insurance Corporation, to discuss current developments.

 

No amount of advice can prepare you for a job like Fed chairman. You have to learn as you go, sometimes painfully. Early on, I had breakfast with Greenspan in the chairman’s dining room. I asked him for any tips he might have. With a straight face, but eyes twinkling, he told me that when dining with an official guest, it was important to sit where you could see the clock. That way you’d know when the meeting was over. It was his only advice. New York City Mayor Michael Bloomberg was more to the point: “Don’t screw up,” he said, at a dinner we attended together.

 

 

I SLEPT FITFULLY the night before my first testimony as chairman on February 14. Although I would testify dozens of times over the next eight years, I always disliked it. Testimonies were sometimes endurance contests, requiring as much as four or five hours of uninterrupted concentration. I made it a point not to drink anything for at least a couple of hours before the testimony began, so I did not have to ask for a break. Even more stressful was the need to calibrate answers knowing that they would be parsed not only by the members of Congress in front of me but by the media, the markets, and the public. My days as a professor helped me stay unruffled most of the time. After a question or statement, I would consider how I might respond to an economics student. By assuming the role of teacher, I could usually ignore any antagonism or ulterior motives behind the questions.

 

In my first hearing, I delivered a generally upbeat message. The economy had grown by more than 3 percent in 2005, a vigorous pace, and the unemployment rate had fallen below 5 percent. We expected healthy economic growth to continue in 2006 and 2007. Inflation remained under control. With the economy apparently needing little help from monetary policy, we were continuing our campaign—begun in mid-2004—of hiking our target for the federal funds rate by a quarter percentage point at each meeting. It now stood at 4-1/2 percent.


I noted that housing was slowing. That was to be expected, I said, and wasn’t inconsistent with solid overall economic growth, because other sectors seemed likely to take up the slack. But, I warned, given that house prices and construction had soared over the past several years, they could decelerate more rapidly than we expected. We didn’t know how housing would evolve but I promised that the Fed would monitor it closely.

 

My first FOMC meeting as chairman was scheduled for March 27–28—two days instead of the usual one. Under Greenspan most FOMC meetings were a single day, which in practice meant about four hours of actual meeting time, allowing our statement to be released precisely at 2:15 p.m. The Committee met for two days twice a year, in January and June, with the extra day usually dedicated to staff presentations on a special topic. I wanted more two-day meetings to allow extra time for deliberation, a point I raised in one-on-one conversations that I had with every FOMC participant during my first few weeks as chairman. We agreed initially to double the number of two-day meetings, to four each year (out of eight).

 

I also made changes in the meeting format intended to further one of my goals—reducing the identification of the Fed with the chairman by making it clear that monetary policy decisions were vested in the Committee, not a single person. I decided to summarize Committee members’ thoughts on the economic outlook before giving my own—to show that I had heard and was considering their views. And during the policy deliberations that followed the economic outlook discussion, I would speak last rather than first, as Greenspan had always done. My intent was to avoid unnecessarily suppressing member opinions. The Fed is a strong and deep organization, and I wanted people to understand that extensive analysis and debate go into every decision.

 

As an academic, I had always valued frank discussion, which allowed new ideas to surface and be thoroughly vetted. For that reason I tried to encourage more spontaneous exchanges among Committee members, who had become accustomed to reading prepared statements. I introduced a convention, common at academic conferences, that participants could raise two hands to ask for immediate recognition to offer a short question or comment. We called the practice a “two-handed intervention.” I would also sometimes ask colleagues to amplify a particular remark. These initiatives helped, but our discussions never became as free-flowing as I hoped. Nineteen people is perhaps too large a group for informal debate.

I did get one early indication that my depersonalization campaign was working. When Alyssa returned to college in fall 2006, a friend asked her what her father did for a living. “Well,” Alyssa said, “actually, my dad is the chairman of the Federal Reserve.” According to Alyssa the friend, dumbstruck, replied:

 

“Your dad is Alan Greenspan?!”

 

 

WITH THE DEPARTURE of Greenspan and the resignation of Ned Gramlich in August 2005, five of the seven Board seats were occupied: by Roger Ferguson (vice chairman), Sue Bies, Mark Olson, Don Kohn, and me. By the end of June 2006, both Ferguson and Olson had left. Ferguson would ultimately go on to head


TIAA-CREF, which manages retirement funds for teachers and other professionals. Olson resigned to head the Public Company Accounting Oversight Board, a nonprofit corporation created by Congress after the Enron accounting scandal to oversee auditors. The following year, Sue Bies would retire to her home in South Carolina, although she would remain active on corporate boards.

 

The White House nominated three new governors in 2006. I was pleased to have been closely consulted during the process, and I was happy with the president’s choices. White House aide Kevin Warsh and University of Chicago economist Randy Kroszner joined the Board within a month after I was sworn in. Rick Mishkin, my former coauthor, arrived in September. I had served with Kevin at the White House, where he covered banking and financial issues for the National Economic Council. Before the White House, he had worked on mergers and acquisitions for the investment bank Morgan Stanley. At thirty-five, Kevin was the youngest person ever to serve on the Federal Reserve Board. His youth generated some criticism, including from former Board vice chairman Preston Martin, but Kevin’s political and markets savvy and many contacts on Wall Street would prove invaluable.

 

Randy’s scholarship focused on banking and finance, and, like me, he had a strong interest in economic history, including the Depression. We had gotten to know each other at academic conferences before I came to the Fed. He would take over the leadership of the bank supervision committee when Sue left.

 

Rick, with his high energy and sometimes off-color sense of humor, was the antithesis of the staid banker one might imagine serving on the Federal Reserve Board. Having worked with him, though, I knew that he had thought deeply about monetary and financial issues and had strong convictions. I expected Rick would be an ally on the FOMC and help me nudge the Fed toward inflation targeting.

 

In a final change, at my suggestion, the White House nominated Don Kohn as vice chairman, to succeed Roger. Don and I had joined the Board on the same day three and a half years earlier, and now we would work together to lead it.

 

Despite the addition of three new members in 2006, with Sue Bies’s departure a year after I became chairman, once again only five of the seven Board seats were filled. For various reasons, most notably the routine blocking of Fed nominees in the Senate, we would function with only five members for most of the next three and a half years.

 

 

AT THAT FIRST FOMC meeting of my chairmanship, in March 2006, my colleagues and I were upbeat. We saw the cooldown in housing as mostly good news. A decline in construction and the flattening of house prices would let some air out of any potential bubble and help slow overall economic growth to a more sustainable level, reducing the risk that inflation might become a problem. We voted unanimously to increase the target for the federal funds rate by a quarter of a percentage point to 4-3/4 percent, the fifteenth consecutive quarter-point increase.

From this point on I knew policy might get a little more difficult. The federal funds rate was very


close to what we assessed to be a normal level. But the economy still seemed to be running a little hot and energy prices had moved up, making us a bit concerned about inflation. A few more rate increases might make sense. But the end of tightening seemed in sight.

 

Then I made a rookie mistake—actually two mistakes. I wanted to create flexibility for us to deviate from the quarter-point-increase-per-meeting pattern that we had followed since June 2004. Soon it might make sense to leave rates where they were for a meeting or two while we assessed the economy’s prospects. I signaled that possibility in my testimony to the Joint Economic Committee (a committee with members from both the Senate and House) on April 27. I said that “at some point in the future” the FOMC “may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook.” I added, “Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings.”

 

My message seemed clear enough. I was saying that at some point—not necessarily the next meeting— we might skip raising rates to allow more time to assess the situation, but that doing so wouldn’t necessarily mean the tightening was over. Assuming that my words would be taken at face value was my first mistake. Markets dissected my every syllable for the coded message they knew must be there. They decided that I had announced an immediate end to the rate increases, and reacted sharply, with longer-term interest rates falling and stocks rising. I was upset by the miscommunication. Given the apparent momentum of the economy, I thought it reasonably likely that we’d need at least one more rate increase.

 

The following Saturday evening I attended the White House Correspondents’ Dinner in a banquet hall of the Washington Hilton, along with several thousand other people. The Correspondents’ Dinner is one of several large, glitzy media dinners on Washington’s social calendar. I disliked all of them but I really disliked the Correspondents’ Dinner. Originally intended as an opportunity for Washington correspondents and politicians to relax and mingle socially, the dinner was in practice an orgy of table-hopping and celebrity-watching, with the buzz of voices continuing even through the program. (Attending once as a governor, I had been disappointed when I could not hear what turned out to be one of Ray Charles’s last live performances.) I went to the dinners for a while. Greenspan had always done so. I thought it was expected, and that it might help me to meet some of the other attendees.

 

At a reception before the Correspondents’ Dinner that particular weekend, I met Maria Bartiromo, the well-known anchor of the CNBC business news cable channel. She remarked that the market had taken my comments to the Joint Economic Committee as a signal that Fed rate hikes were over. Thinking that we were off the record, I told her that I was frustrated by market participants’ inability to grasp the plain English meaning of my statement. Second mistake.

The following Monday, as I was working in my office, my Bloomberg screen showed a sudden drop in the stock market. I was puzzled, but shortly thereafter learned the reason. Bartiromo had reported her conversation with me, in particular my concern that my testimony had been misinterpreted. Markets reacted instantly.


A wave of criticism followed, including from Senator Bunning at my next congressional testimony in May. Michelle Smith and Anna tried in their own ways to help me keep it all in proportion, but I felt terrible. The effects of my slip on the markets were transient, and I didn’t expect any meaningful economic damage. But I had been working to establish my personal credibility, following in the footsteps of the legendary Greenspan, and it seemed possible to me at the time that the gaffe had irreparably damaged public confidence in me. In time the storm blew over, but I had learned an important lesson about the power that my words now carried.

Years later, before a speech I was giving to the Economic Club of New York, Bartiromo apologized to me. I told her truthfully that it had been more my fault than hers.

 

 

WE WOULD END UP raising rates twice more in 2006, in May and June, bringing the federal funds rate to 5-1/4 percent. Economic growth appeared to be moderating, in large part because of slowing housing construction. We noted in our statements that the decline in housing might quicken. But as before, we saw a gradual deceleration in housing as consistent with more balanced and stable growth.

 

Meanwhile, unemployment remained below 5 percent, and inflation had picked up. In part, the higher inflation reflected increases in oil prices, which staff economists expected would have only a temporary effect on overall inflation. However, many FOMC participants worried that inflation might develop some momentum. The Committee unanimously supported the rate increases. In June, we said “some inflation risks remain”—implying that we had not yet made up our minds whether to end our tightening campaign or to raise rates. The decision would depend on economic developments, especially on the persistence of inflation.

 

The next meeting, in August, was my first as chairman that required a tough policy call. Both the data and anecdotal reports from businesspeople suggested that inflation pressures continued to build, even excluding volatile energy prices. We had no official numerical target for inflation at that time, but the recent inflation data had shown price increases consistently exceeding what many FOMC participants had indicated was their comfort zone—2 percent or a little less. Also, wages were rising more rapidly than before, which, while good for workers, also meant that firms would be facing higher production costs and thus greater pressure to raise prices. Many participants supported another interest rate increase, or at least a postmeeting statement signaling strongly that another increase could occur in the future.

 

After seventeen consecutive quarter-point increases, and after consulting with Don Kohn, Tim Geithner, and other Committee members, I resolved to pause our rate-hiking campaign. I didn’t think we should rule out future increases, but I didn’t think we should strongly signal further increases, either. Economic growth was slowing and housing construction continued to fall. We did not know how fast housing would contract, or how much flatter house prices might affect homeowners’ spending. I also knew that it took time for interest rate changes to have their full effect on the economy. We had already raised rates quite a bit, and it was possible that our prior rate hikes, over time, would be enough to calm


inflation. I proposed that we leave the federal funds rate unchanged, while hedging our bets a little by continuing to acknowledge in our statement that “some inflation risks remained.” The Committee agreed, except for Richmond Fed president Jeff Lacker, consistently one of the FOMC’s most hawkish members.

 

THE END OF rate hikes was not the only consequential economic policy event of the summer of 2006. In July, Henry (“Hank”) Paulson became President Bush’s third Treasury secretary, after Paul O’Neill and John Snow. Rangy and athletic, with a broken pinky finger that sticks out at an odd angle, Hank looked like the Dartmouth all-Ivy football lineman he had been when he earned the nickname “the Hammer.” Nearly bald, with blue eyes behind wire-rim glasses, Paulson projected a restless energy that took me some time to get used to.


Date: 2016-04-22; view: 627


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