Governor Meyer presented these remarks
at the Gillis Lecture, Willamette University, Salem, Ore., in spring.
His remarks have been excerpted here.
My concern about the public awareness of the FOMC was heightened
recently during one of the weekly luncheons governors host for a
small group comprised of the staffs at the Board and Treasury. A
very senior member of the Treasury staff, during our luncheon conversation,
asked me if I knew what "FOMC" stood for. A strange question, I
thought, coming from so knowledgeable a person. I replied that I
thought I did, but, just to be sure, what did he believe it stood
for? He replied "Fruit Of the Month Club."
So I begin my lecture by noting that FOMC, for the purpose of this lecture,
stands for the Federal Open Market Committee. This committee, established
in the Banking Act of 1935, came into existence on March 1, 1936. It consists
of the seven governors of the Federal Reserve Board and five presidents
of the regional Federal Reserve banks.
It is 9 a.m. on one of eight days, usually Tuesdays, during the year
when the FOMC meets. The Federal Reserve Act mandates that there be at
least four meetings each year and the number of meetings has varied from
four to 19 over the years. Since 1981, the FOMC has met eight times each
year. Meetings generally begin at 9 a.m. and continue until about noon
to 1 p.m. Twice each year, prior to the Humphrey-Hawkins report and testimony,
the FOMC meets over a two-day period. ... Our first meeting will be of
the one-day or more precisely one-morning variety. The most recent such
meeting was last Tuesday [March 31].
I will not be talking about the decision reached last Tuesday, though
it was announced at the end of the meeting. Committee members observe
a blackout period, from the Tuesday of the week preceding an FOMC meeting
to the Friday following the meeting. During this period, it is the practice
not to talk publicly about the economic outlook or current monetary policy.
So I will be talking in general about the FOMC and not specifically about
last Tuesday's meeting.
I will never forget the first time I entered the Board room to take
my place around the table. Each member appreciates the heavy responsibility
the committee has for the economic well-being of the country and the importance
of their personal participation in this process. I spent my career up
to this point studying and teaching macroeconomics, forecasting future
developments in the economy, and analyzing past and prospective macroeconomic
policies. Serving on the FOMC is, without question, the most important
responsibility I could have for which this career has prepared me.
As you enter the Board room, you will undoubtedly be struck by the impressive
size of the oval table—27 feet 1/2 inch long and 10 feet 11 inches
at its widest point. Members of the committee and staff are milling around,
greeting each other, but generally not talking much shop at this point.
Just before 9 a.m. everyone moves to their respective chairs, just as
the chairman, Alan Greenspan, walks in to take his place at one end of
the table. The chairman, by the way enters from a door that connects to
his office, one of the perks of being chairman. I, on the other hand,
have had to walk down the long corridor to enter through the main door
of the Board room.
To the chairman's right is the deputy secretary of the FOMC. To
the right of the deputy secretary is the president of the Federal
Reserve Bank of New York, the vice chairman of the FOMC and a
permanent member of the committee. The remaining governors of
the Board sit in a pre-established order. Just so they don't get
it wrong, their names appear on plaques on the chairs. The vice
chair of the Board sits to the immediate left of the chairman.
The two most senior governors, other than the vice chair, sit
to her left. Then, in order of seniority the remaining three governors
sit across the table, beginning next to the president of the Federal
Reserve Bank of New York. I started out at what I refer to as
the bottom of the batting order when I arrived as a rookie in
June of 1996. I have subsequently moved up to the point where
I now sit next to Bill McDonough, president of the Federal Reserve
Bank of New York, and, on my other side, the two most-junior members
of the Board. The Reserve bank presidents then sit around the
table in a prescribed order that no one can seem to remember the
Only five of the presidents vote at a given meeting. The voting
members are established at the beginning of each year. Initially,
the banks were separated into three groups of two and two groups
of three, with one representative from each group selected by
their boards of directors. In practice, that meant a rotation
of each bank, some every other year and some every third year.
But the New York bank's position was deemed so important—given
that it is located in the nation's and indeed the world's financial
center and given the special responsibility the bank has come
to have for the actual implementation of policy—that the
president of the New York Fed was, in practice, always selected
as a voting member of the FOMC. The unfortunate president of the
Boston Fed, the other member of that two-group, therefore, never
got to vote. That was, after some experience, judged to be unfair
to Boston and the Congress amended the law in 1942 to make the
New York bank a permanent member of the FOMC and to put the Boston
bank into one of the other groups, leaving three three-groups
and one two-group to govern rotations of the remaining 11 presidents.
Senior staff of the Board and of the New York Federal Reserve
bank sit at the far end of the table. I will introduce them as
they participate in the meeting. ... Access to the FOMC meeting
as well as to the material presented to the committee in preparation
for the meeting is carefully and strictly limited. While the discussion
at the meeting will ultimately become public record, the full
transcript will not be available for five years. Minutes of the
meeting, providing a thorough but brief account of the discussion,
but without indicating who said what, will become available the
Thursday following the next meeting. The information in the minutes
or other aspects of the discussion at the meeting could give advantage
to those who obtained this information before it was publicly
released. Their confidentiality is therefore carefully guarded.
The chairman calls the meeting to order and we are under way.
The green light goes on in front of the deputy secretary, indicating
that the meeting is being recorded.
The first order of business is approval of the minutes of the
previous meeting. The minutes are sent to each of the FOMC members
during the period between meetings and any recommended changes
are incorporated into the draft that is then circulated in advance
of the next FOMC meeting. Quite often, small changes are made
in advance of the meeting. The minutes are then almost always
routinely accepted by vote at the start of the meeting.
The first substantive agenda item is a presentation by the manager
of the System Open Market Account at the Federal Reserve Bank
of New York, Peter Fisher. His presentation covers developments
in the domestic financial and foreign exchange markets and provides
details of open market operations and any foreign exchange rate
intervention during the period since the last FOMC meeting. I
expected, until I had attended my first meeting, that this would
be a rather dull and unrewarding report. But I had not yet met
Peter Fisher. This presentation is one of the highlights of the
meeting, as Peter—armed with colorful charts which identify
market moves accompanying key events in the last several weeks—reads
into the developments in the financial and foreign exchange markets
the response of market participants to the flow of data, events
and comments by members of the FOMC during the weeks since the
last meeting. He might note for example: "See that blip in the
Treasury bond yield. That was in response to Governor Meyer's
speech!" Eyes momentarily turn in my direction, before returning
to Peter for his next insight. At the end of his presentation,
he will ask for votes to ratify the Desk's open market operations
and foreign exchange intervention, if any, during the period since
the last meeting.
Up next is the director of Research and Statistics at the Board,
Mike Prell, who presents the Board staff's forecast. He may share
the honors with the director of the Division of International
Finance, Ted Truman, especially when international developments
are particularly important in shaping the economic outlook, as
has been the case from the onset of the Asian crisis. The forecast
has previously been circulated to members of the FOMC—typically
the preceding Thursday—in a document known as the Greenbook,
by virtue of the color of its cover. Part I includes the forecast
and analysis of the outlook. Part II includes a detailed analysis
of recent developments in the economy and financial markets.
The forecast is put together by a group of about 25 staff members,
beginning about 10 days before the FOMC and usually concluding
the Wednesday before the meeting. It is circulated at the Board
early on Thursday and arrives at the Reserve banks during that
day. It is a judgmental forecast, constructed with the help of
a variety of equations which describe the way various components
of aggregate demand and various prices get determined. I have
written previously about how the forecast is developed at the
Board. The only issues I might note here are the questions of
what the staff assumes about future monetary policy in putting
its forecast together and whose forecast it really is.
The staff appreciates that its role is not to forecast or prejudge
the policy decisions of the committee. But how can the staff make
a forecast of what is going to happen in the economy if it does
not include in that forecast a view of how monetary policy will
evolve? The compromise is, in most cases, to assume no change
in policy, meaning no change in the federal funds rate, which
we will soon see is the key decision that the FOMC makes at each
meeting. The forecast thus reflects the staff's assessment of
how the economy will evolve in the absence of any change in policy
today or at subsequent meetings over its forecast horizon, which
typically includes the remainder of the current year and the following
year. This can be a very effective device for making decisions
about policy. The FOMC gets the staff's view of what will happen
if there is no change in policy and if they judge this outcome
both credible and unsatisfactory, they have the necessary motivation
for action to change policy. However, on those occasions where
it appears clear that a constant funds rate would be greatly at
variance with the committee's objectives, the staff will incorporate
into the forecast some judgment about the change in the funds
rate over the forecast horizon.
Whose forecast is this? Is it really the staff's independent
judgment, or is it the chairman's forecast that the staff has
dutifully adopted as their own? I wondered about this myself before
joining the Board. I can only talk about my experience, though
I have, as you might guess, taken some interest in the workings
and history of the FOMC, and will over time develop a better understanding
of past practice. But it is very clear today that the forecast
is the staff's independent judgment. That judgment is, to be sure,
influenced, as is appropriate, by ongoing discussions with the
members of the Board and the less frequent discussions with the
FOMC. But the fact is that there are really 20 forecasts on the
table, as it were, at an FOMC meeting. Each president comes with
his or her own forecast, developed by the economic staff of that
bank. Each of the governors comes with his or her own implicit
or explicit forecast. None of the other forecasts is put together
in so much detail, by so large a staff, and represent as many
hours of careful work as that by the Board staff. Neither the
chairman nor the other members of the Board interfere with the
staff's exercise of its important responsibility to use its best
judgment to provide all the members of the FOMC with a careful
Each Monday the staff reports on the data and events of the
preceding week to keep the Board members up to date, and Board
members have the opportunity to question the staff's judgment
on the interpretation of that data. On the Monday preceding FOMC
meetings a more lengthy and detailed presentation of the outlook
is presented to the Board by its staff. The presidents, of course,
are briefed by their own staffs and also get copies of the briefings
presented to the Board by its staff each week.
At the conclusion of the presentation on the staff forecast,
the chairman asks if there are any questions for the staff. Most
of the questions will come from the Reserve bank presidents because,
as I just noted, the governors have already had the opportunity
to raise questions with the staff the previous day.
At the conclusion of the questions, we begin the first of two go-rounds,
the core of the meeting. Each member of the FOMC presents his or her own
views on the outlook in the first go-round. The current practice is that
bank presidents generally go first, because they have information that
the governors do not have—information about developments in their
own regions. The presidents, in addition to having regional information,
also tend to have real-time information about consumer spending, business
investment, and wage and price developments, for example, gathered from
speaking to firms in their districts. The particular order otherwise is
not prescribed and evolves through what I refer to as the "wink system."
Each FOMC member winks at the deputy secretary when he or she wants to
be put on the list of presenters, and the chairman calls upon the FOMC
in the order on that list. The presentations are generally about five
minutes long and focus on a few key points that the committee member feels
are of importance to the policy problem of the moment. The presentations
do not offer detailed alternative forecasts, compared to the staff, but
committee members often seek to position themselves relative to the staff
forecast—stronger or weaker growth, higher or lower inflation, etc.
How the chairman participates in the meeting has changed over
time, depending on the preference of the incumbent. Alan Greenspan
does not participate in the outlook go-round.
There is not much in the way of exchanges between members of
the committee during this process. Each member speaks, then gives
way to the next. Many speak from a prepared text or a detailed
outline, although there is a more than an occasional effort by
each member to relate his or her remarks to what has gone before.
Still, the process is not one of discussion but of a series of
self-contained, only sometimes interrelated, presentations.
At the end of the outlook go-round, it's time for a coffee break.
While the committee and staff are so occupied, I am afraid that
you have additional work to do. We are about to move to the crucial
stage, the discussion of policy options, and the vote on policy.
The time has come for your economics lesson.
The outlook discussion has set the stage for the policy decision
by interpreting the current state of the economy—where we
are today—and assessing where we are headed over the next
year or two in the absence of a change in policy. The role of
policy is to move the economy from where we are—and where
we will be in the future in the absence of change—to some
preferred state, specifically related to the Federal Reserve's
objectives of full employment and price stability.
The policy instrument the Fed has to accomplish this is open
market operations, and these will be used to achieve a target
level of the federal funds rate, the rate of interest on overnight
loans in the interbank market. These loans represent the lending
and borrowing of reserves among depository institutions. It is
essentially the price associated with the borrowing of reserves.
And we all know what determines the price in any market: supply
and demand. The economy, by influencing the quantity of transactions
balances, determines the demand for reserves, and the Federal
Reserve affects the supply. By judiciously influencing the supply,
the Fed can effectively control the federal funds rate. While
the federal funds rate itself is not a particularly important
influence on the economy, movements in the federal funds rate
(and expectations about future federal funds rate encouraged by
any change) influence the broad spectrum of interest rates and
financial asset prices in the economy. In this way, changes in
the federal funds rate exercise an important influence on the
demand for goods and services, especially those that are relatively
interest-sensitive. By affecting the demand for goods and services,
open market operations can affect the level of production relative
to productive capacity and inflation pressure in the economy.
I will now very briefly lay out the key economics that we need to move
from the outlook to policy. First, monetary policy cannot influence real
variables—such as output and employment—in the long run (except
via the contribution of price stability to living standards). This is
often referred to as the principle of the neutrality of money. One of
the most important disciplines for policymakers is understanding what
they can and what they cannot accomplish. The Fed, for example, cannot
raise the long-run rate of economic growth. It should not try.
Second, money growth is the principal determinant of inflation
in the long run. This immediately makes price stability (in some
shape or form) the direct, unequivocal and singular long-term
objective of monetary policy. No central bank around the world
would argue otherwise. When it comes to price stability, the buck,
literally, stops at the central bank.
Third, because prices in many markets are slow to react to changes
in supply and demand, shocks to the economy can lead to persistent
departures of the economy from full employment—in both directions.
This proposition offers at least the potential for monetary policy
to play a role in smoothing out business cycles. This is the basis
for what is sometimes referred to as stabilization policy, adjusting
the level of aggregate demand so that it supports a level of production
consistent with full employment.
Fourth, full employment and price stability are compatible.
Indeed, we define full employment as the maximum rate of employment
that can be sustained without rising inflation. Many of us define
it specifically in terms of a threshold unemployment rate, the
rate below which inflation rises over time. This is the concept
of the nonaccelerating-inflation rate of unemployment, or NAIRU.
This means that the two objectives of monetary policy—full
employment and price stability—are compatible in the long
Fifth, inflation pressures arise, in part, from departures of
the economy from full employment. If the economy moves below full
employment, the resulting slack results in disinflation, that
is, downward pressure on inflation. When the economy moves above
this threshold there is continuing upward pressure on inflation.
As a result, open market operations which affect the demand for
output relative to productive capacity provide the FOMC with the
ability to influence inflation pressures in the economy and move
the economy toward its price stability objective.
Short-run swings in inflation can also be driven by supply shocks, changes
in prices of particular goods that are unrelated to the overall balance
of supply and demand in the economy. An example would be a change in oil
prices due, for example, to production decisions by OPEC or weather developments.
It would be difficult, for example, to understand recent U.S. economic
performance and monetary policy without an understanding of the role of
favorable supply shocks. This consideration means that monetary policymakers
must also try to decipher the sources and persistence of shocks to the
The committee is now reassembling to hear the presentation on
policy options by the director of Monetary Affairs, currently
Don Kohn, who, by the way, also serves as secretary of the FOMC.
The policy options were detailed and circulated to the committee
in advance in a document called the Bluebook, again to reflect
the color of its cover. This typically arrives at my house about
mid-morning on the Saturday before the FOMC meeting. The outlook
discussion has set up the context for the policy decision. It
has focused on where the economy is relative to full employment,
how fast the economy is growing relative to its long-term trend,
and whether or not inflation pressures are building. The staff
forecast has provided one view of whether current policy is consistent
with the Federal Reserve's objectives of full employment and price
Don Kohn's discussion will outline policy options, with the
emphasis on the plural. He will not recommend a particular course
of action to the committee. Rather he will offer options and provide
a coherent rationale for each of the options offered. This has
not always been the practice, however. The paper by Wayne that
inspired this presentation indicates that the three senior Board
staff who make presentations at the meeting used to each make
their own specific policy recommendations and these might not
always coincide. Today, it would be a remarkable incident if there
was any disagreement among the Board staff around the FOMC and
none of the staff venture their views about the appropriate course
The Bluebook might discuss as many as three options. Option
A is always a decline in rates. Option B is always no change in
the target funds rate. And option C is always an increase. Depending
on the circumstances, the Bluebook may explicitly offer only two
options. That is, in cases where it appears clear that the decision
will either be to hold rates constant or to increase them, the
staff will not offer an option of a decline. No matter. The FOMC
is free to make any decision it wants, whether or not the staff
has identified that option. In addition, the staff options will
also indicate an amount of change—typically 25 basis points
or 1/4 percentage point, but sometimes 50 basis points.
The second policy decision that will be made at the meeting
is more subtle—a decision between what is referred to as
a symmetric and asymmetric posture. This involves two issues.
First, is there only a remote chance for a change in policy or
a somewhat greater chance for a change in policy in the period
between this and the next meeting? A symmetric directive implies
less chance of a move during the inter-meeting period than an
asymmetric directive. Indeed, some would interpret an asymmetric
directive as providing more of a license for the chairman to change
policy during the period between meetings, while a symmetric policy
is more limiting of the chairman's discretion. But this is nowhere
written down. And, in any case, the FOMC, at least this FOMC,
will expect to be consulted—in the form of a telephone conference
call—in advance of any policy move. A second interpretation
of the directive is information on whether the next policy move
is more likely to be up than down. This is like a reminder to
the committee that a policy action might be in the offing. For
most of 1997, Fed policy was on hold, but the directive was asymmetric,
indicating a greater prospect for a rise than a decline in the
funds rate. With the Asian crisis and the associated expectation
of a slowing in growth, policy turned symmetric in November. You
will not know about whether policy was symmetric or asymmetric
at the meeting last Tuesday until the minutes for that meeting
are released on the Thursday following the next meeting.
After the staff presentation of policy options, the chairman
offers committee members the opportunity to question Don Kohn
on issues related to his discussion of the policy options. Then
we are ready for the second go-round, this one on policy. The
difference in this case is that the chairman goes first. He will
lay out his view of the outlook and then bridge to his policy
prescription. This presents the link from the earlier outlook
discussion to the current policy decision and it gives the chairman
the opportunity to lead the committee, both toward the position
he is advocating and toward a consensus. This is followed by each
of the members, in no prescribed order, but based on the "wink
system," laying out views on the policy decision, commenting on
both the target funds rate and whether the posture should be symmetric
or asymmetric. When the decision is quite clear, there may be
very little discussion during this go-round with members mainly
indicating their agreement with the position recommended by the
chairman. In cases where the decision is less clear, there will
be individual presentations.
Many differing views are presented in the outlook go-round and,
where circumstances justify it, in the policy go-round. There
is encouragement for each member to clearly present his or her
Now the critical moment is approaching, the time to vote. Here
two traditions come into play. The first is that the chairman
is always expected to be on the winning side of a policy vote.
There has not been a case within memory where the chairman has
not been on the winning side of a policy vote at the FOMC. The
chairman is likely to have a good idea of how governors are leaning,
even before the meeting. Board members discuss the appropriate
course of policy on occasion at their regular weekly meetings
when they consider requests of Reserve banks for changes in the
discount rate, especially on those occasions preceding FOMC meetings.
In addition, the economic and policy situation naturally comes
up in informal individual discussions between Board members. Moreover,
as all the FOMC members give their views on the economy during
the first part of the meeting, the outlook go-round, one can often
infer their likely vote—though there are surprises from time
A second tradition is to try to reach a consensus on the policy
decision. It is quite common for there to be differences of opinion
and yet a unanimous vote. This would be the case, for example,
where the question was one of timing rather than of principle.
Unanimous votes are common. One or two dissents are not unusual,
but more than two dissents at a meeting are rare.
Because of these two traditions—that the chairman is always
on the winning side of a vote and that the committee strives to
reach a consensus—the chairman's presentation at the start
of the policy go-round is so important. It is the key moment,
other than the vote itself at the meeting. There is a special
sense of anticipation here because the chairman often will provide
some new data or some new insight in support of his position.
Indeed, the chairman is the most likely of the committee members
to challenge the group with a new way of thinking about recent
developments. The chairman presents a very forceful and clear
argument for a specific policy recommendation. The recommendation,
nevertheless, might be more decisive in the direction and size
of the move than with respect to whether the posture should be
symmetric or asymmetric. The focus of the comments that follow
are why members agree, would prefer another course but can accept,
or strongly disagree with the chairman's recommendation.
When the policy go-round has been completed, the chairman summarizes
his sense of the consensus. For example: No change in the funds
rate (option B) and a symmetric directive. Next the directive
to be voted upon is read by the deputy secretary, conforming to
the outcome of the discussion. The directive identifies the target
funds rate and whether policy is symmetric or asymmetric. The
directive is in effect the instructions to the manager of the
System Open Market Account at the Federal Reserve Bank of New
York. He is to conduct open market operations during the intermeeting
period so as to achieve the intended funds rate as closely as
possible. The wording of the directive was changed late last year
to make it more transparent. Previously, it instructed the manager,
for example, to tighten reserve positions slightly, somewhat or
significantly. A "slight" increase in reserve positions was, in
fact, code for a 25 basis point increase in the funds rate; "somewhat"
of an increase was code for a 50 basis point increase; and a "significant"
increase signaled a 75 basis point increase in November of 1994.
Of course, the manager of the System Open Market Account attends
the meeting and knows the vote was explicitly for a 25, 50, or
75 basis point increase. The revised practice is to report in
the directive precisely the outcome of the vote—a 25 or 50
basis point increase or whatever. This is further progress in
terms of transparency.
The directive also indicates whether there is a symmetric or
asymmetric posture for policy by the use of "woulds" and "mights"
in the discussion of possible adjustments to the federal funds
rate in the period between meetings. For example, a symmetric
policy would be indicated by the wording: "In the context of the
committee's long-run objectives for price stability and sustainable
economic growth and giving careful consideration to economic,
financial and monetary developments, a slightly higher federal
funds rate or a slightly lower federal funds rate might be acceptable
in the intermeeting period." The symmetry is indicated by the
use of slightly in this case with respect to both a higher and
lower federal funds rate and by the use of might with respect
to both options. Sometimes, but not lately, symmetric directives
have used "would" instead of "might" to apply to both options.
An asymmetric posture, with a greater likelihood of a rise in
the federal funds rate than a decline, would be indicated by the
wording: "a somewhat higher federal funds rate would and a slightly
lower federal funds rate might be acceptable in the intermeeting
period." The asymmetry is evidenced by the use of "would" in one
case and "might" in the other, with the "would" indicating the
direction that is more likely; and by using "somewhat" to describe
the size of any increase and "slightly" to describe the size of
Now it's time for the deputy secretary to poll the committee.
The chairman votes first, the vice chairman second and then other
voting members vote in alphabetical order. This is the first and
only occasion when the Reserve bank presidents are treated differently
depending on whether or not they are voting at that meeting. Up
until that point, all have participated on equal terms in the
discussions. Of course, when the chairman gives his sense of the
consensus, he is assessing the consensus of committee members
Finally, if there is a change in policy, it will be announced,
at 2:15 p.m. that afternoon. The announcement indicates the new
intended federal funds rate and also provides a brief rationale
for the policy change. The committee has delegated the wording
of the announcement to the chairman, but he will read it to the
committee and take account of members' suggestions. If there is
no policy change, the announcement is simply, "The meeting ended
at 12 noon. There is no further announcement."
Many committee members have probably had the same experience
as I have had already on several occasions. A friend may come
up to me before a meeting and say: "I understand that an FOMC
meeting is coming up in the next couple of days. What do you think
the chairman will do with rates?" Now there are two issues here.
First, I would never, ever comment on what my vote will be or
speculate on what the committee's vote will be or indicate what
the chairman's position might be. So it is sometimes irritating
to have anyone even ask this question. Of course, they did not
ask about my vote, only what the chairman will do. The second
issue this raises is whether the chairman controls the outcome
to the point where no one else on the committee matters. While
this is clearly an exaggeration, it would be just as silly for
me to respond: "What do you mean? I have one vote, just like the
chairman." This is true, of course, technically. But the reality
is that the chairman in general and a highly respected chairman
like the present one has a disproportionate influence on the outcome.
Many members will voice some disagreement in the go-rounds with
the chairman's view of the outlook or policy recommendation, but
many of those will vote with the chairman in the end. That partly
reflects the importance of consensus and it partly reflects the
respect accorded the chairman. But there is a limit to how the
chairman's influence can be extended and a good chairman never
oversteps this boundary. A good chairman sometimes has to lead
the FOMC by following the consensus within the committee.
Well, we have had a long day of policymaking. You may now know more
than you ever wanted to know about the FOMC. Some of my students felt
that way about macroeconomics at the end of one of my classes! But I doubt
any one here will ever again be guilty of confusing the FOMC with the
Fruit of the Month Club!