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Raining sun at the Fed; the Federal Reserve adds some clarity to its record. Or does it?

When the Fed unexpectedly announced in March that it would make public each board member's vote on interest rates only hours after a Federal Open Market Committee meeting adjourned, three conspiracy theories immediately made the rounds.

There were, first, those who saw this reporting change as a power grab by Alan Greenspan: The immensely popular chairman was attempting to muzzle dissenters by outing them. Then there were those who claimed just the opposite, that the move would give individual Fed policymakers more leverage in the future. Lastly, some said this was just the Fed's latest move towards transparency--a step that was not only natural but inevitable. As with most conspiracy theories, the truth lay somewhere in a mix of the three.

What is clear is that this seemingly innocuous move will likely have an impact on global markets if only because analysts will use it to attempt to speculate on future rate moves. Previously, Fed watchers waited six weeks to find out how individual members came down on interest rates. By that time, the roll call was largely of academic interest and didn't typically move the markets. Had any members of the FOMC actually dissented at the March meeting, the surprise move towards greater transparency would have held more drama. But as it was, the unanimous roll call managed to set tongues wagging over why the Fed had decided to pull back the curtain now.

"This absolutely gives more power to Greenspan," says one former Fed official who asked not to be named. "The last thing anyone wants to look like is a dissenter in the current environment. When there is uncertainty, people close ranks, and everyone is closing ranks around the chairman because so far he has gotten it about right."

A current high-ranking Fed official agreed in part. Looking like a dissenter is riskier in times of uncertainty, he says. But to think that FOMC members would tailor their convictions because they would be made public hours later? That's a bit simplistic. "The personalities in this FOMC are such that if someone felt strongly one way or another about policy, they'd say so regardless

of when their decision would be made public," observes the official. "These FOMC members aren't lemmings; these are people who take their jobs very seriously."

Three Fed officials bristled at the suggestion that the move would further empower the chairman. In fact, they said the new public roll call would do little, if anything, to change their policy decisions. "Anyone who feels strongly enough to dissent isn't going to be swayed in his or her decision just because it will be made public hours later," said one. "Actually, knowing that your comments are going to be seen in six weeks is riskier than an immediate release. By then, so many things may have changed in the economy that your view could look really wrong." Added another Fed official: "What you decided in the meeting was recorded in the context of the moment, but it is released when that moment is gone."

There is no question that the policy change provides another tidbit for Fed watchers accustomed to scant rations. Analysts say the new policy will, among other things, raise the profile of committee mavericks in between FOMC meetings. The immediate disclosure of how they voted will have traders placing bets on split decisions, according to a white paper from economic consultancy Wrightson Associates.

That said, Fed mavericks have been dwindling in number. Although the full contingent of Fed governors is seven, there are currently only five, with two vacancies awaiting confirmation by the Senate. (The bank presidents vote on a four-person rotational basis and the New York Fed president always has a vote.) The president of the New York Fed traditionally doesn't openly oppose the chairman. Of the remaining eight rotating members, newcomers Susan Bies and Mark Olsen are unlikely to dissent: New governors generally don't break ranks in their first year while they feel their way around the organization.

As for Vice Chairman Roger Ferguson and Governor Ed Gramlich--they have never dissented in four years of voting. That leaves four regional presidents who, at best, could find themselves wrestling with a newfound prominence: Philadelphia's Anthony Santomero, Dallas Fed President Robert McTeer, Minneapolis Fed President Gary Stern and Cleveland's Jerry Jordon.

Santomero has only just become a voting member of the FOMC, though he has been president of the Philadelphia Fed for nearly two years. So far, his public statements about the economy have been very candid. Some analysts say that his remarks are reminiscent of formerGovernor Laurence Meyer, whose comments suggested fissures between his views and Greenspan's. Meyer had only dissented, however, once, and it is was on a technical issue associated with money supply targets rather than in opposition to Greenspan's read on the economy.

McTeer, meanwhile, is known as the FOMC's Lonesome Dove and a bit of a maverick. He dissented twice in 1999 and has been keen to test the limits of this new economy. He was out front on seeing economic salvation in productivity growth.

Minneapolis' Stem, on the other hand, has a reputation for being a hawk. His previous dissents all occurred in 1996 when he began to call for rate increases almost nine months before the rest of the FOMC ultimately acted. He told the press in February that his "foot isn't heading for the brake" yet, but analysts predict he will be one of the first members agitating to take back some of last fall's rate cuts by the second half of this year.

Jordan of Cleveland has dissented more often than any other member currently on the FOMC, voting or non-voting, and six of his past eight dissents were in the direction of greater restraint. Although he never dissented during his last voting rotation in 2000, he, too, is likely to be among the hawkish contingent agitating to raise rates.

At the same time, this is precisely the kind of prognostication that worries Fed policymakers. Meyer frets that personalities will supersede substance and that analysts will focus too much on "who said what and when."

Still, the question that begs to be answered is: Why now? As much as Fed watchers love to find intrigue, two Fed officials close to the decision said there was little mystery behind the new policy, and that it has been months in the making. Just before he left the Fed, Meyer made a presentation to the board of governors about transparency. His discussion laid out a series of steps the Fed could take to make its operations more understandable to the public. The list included releasing details about how members voted, speeding up the release of the minutes and working to make the minutes more readable and accessible. Because the discussion occurred towards the end of the meeting, Fed Chairman Alan Greenspan said he'd bring together a group to consider Meyer's suggestions and act at a later date.

Evidently they did. Meyer's presentation focused minds on an issue that had been nagging Fed policymakers for some time. Central bank lawyers said the Fed would be better off opening up the process sooner rather than later. The concern was that it was only a matter of time before a carefully worded request under the Freedom of Information Act would force the Fed to release the roll call anyway. The central bankers agreed that it would be better to make the move voluntarily than for the Fed to appear as if it was compelled to do so, said two officials privy to the discussions.

For anyone who has been following the Fed's progress under Greenspan's chairmanship, the move towards more transparency could hardly come as a surprise. According to an internal analysis published last year, the Fed tracked how financial markets had become better at anticipating policy changes in the last six years when compared to the period lasting from 1989 to 1994. Much of that stemmed from the Fed's newfound openness, they said.

Still, the Fed is walking a careful line. In a speech last October to central bankers and economists in St. Louis, Greenspan worded aloud that openness sometimes conflicted with the Fed's responsibility to make good decisions. "We have gotten to our present degree of transparency through an incremental process and our disclosure policy will continue to evolve" Greenspan said. "At each step, we need to review whether in our judgment this new degree of openness optimizes the Federal Reserve's ability to implement effective monetary policy."

The jury is still out on that. What is clear is that an immediate release of the way FOMC members voted will, if nothing else, send Fed watchers scurrying to the bottom of the Fed's statement. It's those dissenters who will likely start the rate-raising cycle later this year.

Miss Temple-Raston is a producer at CNNfn in New York. Her first book, A Death in Texas, was published by Henry Holt & Co. in January 2002.
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Author:Temple-Raston, Dina
Publication:The International Economy
Date:Jun 22, 2002
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