Inside the FOMC: in his new book, a former Fed governor provides a rare glimpse of the inside workings of the Greenspan Federal Reserve

International Economy, The, Summer, 2004 by Laurence Meyer

When I was sworn in as a governor on June 20, 1996, the economy was in the sixth year of an expansion. The Dow Jones Industrial Average was up more than 20 percent for the year, manufacturing was picking up steam, and home sales were hitting their highest marks in a decade.

But in the cool confines of the Federal Reserve, the celebration was muted. Already, many staffers were worrying that the strong growth and low level of the unemployment rate would soon encourage workers to demand higher wages. Those demands, in turn, would begin fueling inflation, which had burned through the economy with such destructive force in the 1970s and 1980s.

With the economy growing strongly and already near full employment, the mission of the Fed was to encourage a "soft landing." In economic terms, a soft landing occurs when growth slows--just as the economy reaches full employment--so that the unemployment rate remains steady. If inflation is also low enough, at this point, then the FOMC has achieved its two primary objectives, full employment and price stability. (1)

It's analogous to an extraordinarily smooth aircraft landing, so perfect that you want to applaud the pilot: In this case, the pilot is the FOMC, the airplane is the actual output of the economy, and the runway is the maximum sustainable output of the economy.

In the best of all worlds, the FOMC pilot should be able to bring a soaring economy right down onto the firm surface of the maximum sustainable level of output--without blowing out all the tires. Unfortunately, as 1 learned over the next few years, it takes a lot more luck to land an economy than it does an airplane.

Nevertheless, it was the issue of bringing the economy down to earth that dominated my first FOMC meeting on July 2 and 3, 1996. Walking into the Fed, you get the feeling that important business is being done here. And so it was that day.

AS ALICE RIVLIN and I entered the room, we were welcomed warmly into the club. I had already met the other Board members--Mike Kelley, Larry Lindsey, Susan Phillips, Janet Yellen, and, of course, Alma Greenspan--but I had previously met only a few of the Reserve Bank presidents.

The senior Fed staff members were also milling about--including Mike Prell, in charge of preparing the staff forecast of the U.S. economy; Ted Truman, director of the Division of International Finance, in charge of monitoring developments in foreign economies; and Don Kohn, director of the Division of Monetary Affairs, in charge of providing guidance about policy options. Prell, Kohn, and Truman played an important role in preparing the Board members for FOMC meetings. They also provided guidance to all the Committee members during meetings. As a result, they wielded considerable power. For that reason, as I have mentioned, they have been dubbed "the Barons."

A few minutes later, Greenspan entered the room and walked immediately to his place at the imposing mahogany meeting table, signaling everyone else to take their respective chairs. He already had his game face on, that inscrutable expression behind reflective glasses. The Chairman, I noted, entered from a door that connects to his office. The rest of us entered through the main door of the boardroom.

I FIRST MET the Chairman in December 1994, when I was invited to sit on a panel of academics and present my views on the outlook and monetary policy to the Board. I had seen him three times since then, once at another academic panel discussion at the Board, again at the ceremony for my nomination as governor, and finally at my confirmation hearing. But I had never been in the inner circle before. Now I was about to learn the secrets of the temple. (2)

AS WE SAT DOWN for my first FOMC meeting, I noted that Norm Bernard, the deputy secretary of the FOMC, was seated to the Chairman's right. He was there to keep the agenda on track, help the Chairman determine whose turn it was to speak next, read the proposals as they came up for a vote, and conduct the roll call vote. To the right of Bernard was William McDonough, president of the Federal Reserve Bank of New York, the Vice Chairman of the FOMC, and a permanent member of the Committee. (3) To the left of the Chairman was Alice Rivlin, the new Vice Chair of the Federal Reserve Board.

The remaining governors of the Board were seated relative to the Chairman according to their seniority on the Board. Just so they didn't get it wrong, their names appeared on little plaques on the chairs. The other Reserve Bank presidents also sat around the table in a prescribed order, for which no one could seem to remember the logic. The staff Barons also had a place at the table, while the other members of the staff were seated in chairs on all four sides of the room.

Now I noticed a green light come on in front of the deputy secretary, indicating that the meeting was being recorded. First, Alice Rivlin and I were formally welcomed by the Chairman. Then Peter Fisher, the manager of the system's portfolio (4) and an officer of the Federal Reserve Bank of New York, briefed the Committee on developments in the financial and foreign exchange markets, using an array of charts to drive his points home. He also reviewed the operations conducted on behalf of the Committee in the government securities and foreign exchange markets.