A Glimpse into the Federal Reserve

The Federal Reserve recently released a transcript of their Open Market Committee (FOMC) meeting in September 16, 2008. The FOMC oversees the Fed’s “Open Market Operations,” purchase and sale of bonds; the Fed controls our money supply through this mechanism. It makes sense for the operational arm of the Fed to convene bright and early—8:30am—that day. This meeting took place in the thick of the financial crisis. Chairman Bernanke opened the session: “Good morning, everybody. Sorry for the late beginning. The markets are continuing to experience very significant stresses this morning, and there are increasing concerns about the insurance company AIG.”

The committee went on to discuss the liquidity crises at Lehman and AIG, and then examines the reactions of other central banks. One of their first points of order was how to, in Bernanke’s words, “offer swaps to foreign central banks as needed to address liquidity pressures in those other jurisdictions.” Essentially, how to make sure that foreign banks had enough dollars to run smoothly. The commentary of Mr. Dudley, Manager of the System Open Market Account, on the matter caught my eye:

“Would a big size that’s fixed in quantity be most effective? Would an open limit be most effective? I think we have to have those discussions. I think the important thing here—and what we’re going for—is credibility. In a crisis you need enough force—more force than the market thinks is necessary to solve the problem—and we’re going to have to have discussions to determine how much is enough force.”

In this statement, he acknowledges that technical actions to stabilize balance sheets are only half the Fed’s battle. They also must exude enough confidence and power to convince the markets that they control the situation. Mr. Dudley’s rationale illuminates part of the purpose of aggressive, unconventional US monetary policy over the last few years. In addition to directly shoring up bank reserves and expanding the money supply, it partly serves a PR campaign for economic confidence.

Later on, the committee formulates a statement on the situation. They debated the last sentence of their statement provoked a surprisingly long debate—about five pages of transcript. Specifically, the committee considered using the word “closely” versus the word “carefully” in “The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.” At one point, the group digs down to roots of grammar, mentioning that “closely” is an adverb as opposed to an adjective.

Chairman Bernanke notes the ludicrousness of their discussion, but also its relevance. “We have seventeen people debating over this word, and it actually does matter.” As Mr. Kronzner points out on page 81 of the transcript, the market hangs on their every word. He points out that traders have fixated on their use of the word “yet.” To the group’s laughter, he points out that “closely” might garner as much, or even more attention, because it has two syllables.

Despite their prolonged debate, the FOMC unanimously supported their final statement. They eventually settled on “carefully,” which they believed showed genuine and active concern for the situation without implicitly promising a particular policy action on their part.

These documents, if you’re interested in tackling (or at least skimming through) a hundred pages, provide a glimpse behind the closed doors of monetary authority at a pivotal moment. They portray a remarkably focused, functional, and amicable team. Their quick actions reflect the general assumption that, at least in the United States, monetary policy provides the best opportunity for economic adjustments because moves much more nimbly than fiscal policy, which is run by Congress.

Credit goes to Marketplace for the original tip on this story.

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