Greenspan Praises the Fed's Moves

The Federal Reserve probably will never get to the point of broadcasting its deliberations on television, but it has made great strides in removing the secrecy surrounding monetary policy, Federal Reserve Chairman Alan Greenspan said Thursday. 

Greenspan said the Fed decision in 1994 to begin announcing any changes in interest rates immediately has helped the Fed communicate more effectively with financial markets and the public. 

All the Fed's changes to fuller disclosure, Greenspan said, were taken ``in recognition that we, as elected officials are accountable both to the Congress from which we derive our monetary policy mission and, beyond, to the American people.'' 

Greenspan, in his remarks prepared for an economic policy conference in St. Louis, made no mention of current economic conditions or what the Fed may do next on interest rates. 

Many economists believe the country is now in a recession caused by the Sept. 11 terrorist attacks. They are predicting that the Fed, which has already reduced interest rates nine times since the beginning of the year, will cut rates for a 10th time when policy-makers next meet on Nov. 6. 

Greenspan used his speech to review how the Fed has moved in recent years to provide more information to the public and financial markets more quickly. 

Before 1994, the central bank never announced changes in its key monetary instrument, the federal funds rate. Instead, financial markets had to watch the daily operations of the Fed's New York branch in buying and selling Treasury securities to try to devine whether the central bank was changing rates. 

All that changed in 1994 when the Fed, under Greenspan's prodding, started announcing immediately after regularly scheduled meetings of its Federal Open Market Committee, whether policy-makers had decided to change rates. 

The Fed has also moved to provide immediately after the meetings the FOMC's expectations for what the greatest threats will be to the economy going forward, useful information for investors trying to guess future rate moves. 

In an agreement made with the late Rep. Henry B. Gonzalez, D-Texas, the central bank now releases the full transcripts of its closed-door deliberations five years after they occur. Gonzalez, as chairman of the House Banking Committee, had campaigned for a number of years to open the Fed to more scrutiny. 

Greenspan said the decision to announce changes in the Fed's target for the federal funds rate, the interest that banks charge on overnight loans, has proven very beneficial by taking away the uncertainty that faced markets in the past in trying to determine whether the Fed was changing rates. 

``Simply put, financial markets work more efficiently when their participants do not have to waste effort inferring the stance of monetary policy from diffuse signals generated in the day-to-day implementation of policy,'' Greenspan said. 

``Being clear about that stance has not constrained our ability to adjust the stance of monetary policy in either direction,'' Greenspan said. 

Greenspan is widely viewed as having done more during his 14 years as Fed chairman than any of his predecessors to open the traditionally secretive Fed to greater public scrutiny. 

In his remarks, Greenspan noted that past economic theory held that the Fed should act with as much secrecy as possible to keep markets guessing as to what its future policy moves might be. 

But he said those old theories lost support given the increased size and complexity of financial markets. 

``As markets, experience and the magnitude of outstanding financial instruments changed, the dead-weight loss created by such uncertainty - read risk - became increasingly evident, as did the value of transparency,'' Greenspan said. 

While some have urged the Fed to stop deliberating in secret and instead televise its meetings, Greenspan said he did not believe such a move would be conducive to making sound decisions. 

``Human nature being what it is, the vast majority of us are disinclined to offer half-thought-through, but potentially useful, policy notions only to have them embarrassingly dissected in front of a national television audience,'' Greenspan said. 

``The undeniable, though regrettable, fact is that the most effective policy-making is done outside the immediate glare of the press,'' he said.