Fed's Secretive Decisions Need `Sunshine'

Now that Fed chairman concedes that detailed records of key policy meetings exist, they should be made public

By , an informal group of current and former Fed and Treasury employees. The author gratefully acknowledges the assistance of HGS members.

ON Oct. 19 Federal Reserve Board Chairman Alan Greenspan and several Federal Reserve Bank presidents appeared before the House Banking Committee. The hearing focused both on proposals to make available verbatim written transcripts of Federal Open Market Committee meetings and dealt with changing the appointment process for the regional Federal Reserve Bank presidents. Through its decisions influencing interest rates, the FOMC is a critical player in determining United States economic policy.

Rep. Toby Roth (R) of Wisconsin directly questioned Mr. Greenspan on the existence of tapes and transcripts following the chairman's opening remarks. Greenspan replied that the tapes that existed were routinely erased. Written queries prior to the hearing from Mr. Gonzalez to FOMC members also asked about tapes, transcripts, or formal notes. In response to one of Mr. Roth's two successive questions, Greenspan replied only that ``no mechanical transcriptions'' were preserved.

By focusing on the question of mechanical transcriptions, Greenspan seemed to imply that no transcripts existed beyond the summary minutes of monetary-policy sessions. Officially, the Fed says it re-records over the tape used to prepare summary minutes of the FOMC's monetary-policy sessions and that no other electronic records are maintained.

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But Mr. Gonzalez and his staff have been hearing from inside sources that, contrary to the line from the Fed bureaucracy in Washington, verbatim written transcripts of the FOMC's secret deliberations do exist. These documents are said to stretch back to the era of Fed Chairman Arthur Burns (1970-78), who in 1976 discontinued the original practice of releasing after a five-year delay detailed minutes.

Fed officials in Washington say Greenspan initiated a conference call on Friday, Oct. 15, to reveal to regional Federal Reserve Bank presidents for the first time the existence of full FOMC transcripts dating to 1976. Several presidents on the call reportedly were angry upon hearing Greenspan's confession. Others counseled ``stonewalling'': Having already delivered written statements to the Banking Committee that denied the existence of transcripts or tapes, they would have been in an awkward position come hearing day.

Greenspan met with some Fed bank presidents the following Monday evening and at breakfast Tuesday, Oct. 19 to finalize ``what to do about the transcripts.'' Greenspan reportedly agreed to inform Gonzalez's panel about the transcripts during his opening testimony that morning. This morally correct position apparently was supported by Fed public affairs chief Joe Coyne, a senior staffer of the FOMC whose tenure began in the Burns era.

Mr. Coyne staunchly defends the Fed's veil of secrecy (as opposed to its independence from political meddling). In this case, though, he recognized that the chairman was obliged to Congress, other members of the FOMC, and the public to come clean. Yet when Greenspan appeared before the House Banking Committee on Oct. 19, all he said about the existence of the until-then secret Fed transcripts was that each meeting is taped, a transcript is prepared, summary minutes are distilled from the transcript, and the tapes are erased. Several presidents and governors noted Greenspan's failure to call attention to the transcripts (separate from his description of the regular minutes), yet none took the opportunity to raise the issue with the committee.

Anna Schwartz, a respected economist and a leading authority on the FOMC who also testified before Gonzalez, concedes that she was ``confused'' by Greenspan's statements. ``He did not address the issue directly,'' Schwartz notes. ``The Fed has been lying about the transcripts for years. I could not discern whether he was talking about old transcripts or the regular meeting `notes' prepared after the FOMC meets. As far as I could tell sitting in the room, Greenspan did not clearly and explicitly disclose the existence of written verbatim transcripts so that members of the committee understood what he said.''

In an interview after the hearing, Mr. Coyne conceded that the ``rough, unedited transcriptions'' of FOMC meetings dating back to 1976 era are kept ``under lock and key.'' Several days later, in a press release, Greenspan did likewise, finally admitting that transcripts do exist.

Ultimately, this was the right thing to do. But it catches the central bank in a legal and political trap of its own design. Public release of FOMC transcripts has been the subject of a series of lawsuits between 1975 and 1987, but the central bank consistently denied that any transcripts or tapes exist.

After last week's congressional hearing, Greenspan was overheard telling one Fed bank official that, had Roth been allowed to ask another question (he was cut off by a punctual Gonzalez gavel), he might have been compelled to reveal the existence of an entire set of secret written transcripts. Dr. Schwartz likewise says, ``Gonzalez cut Roth off from asking a further question.''

Whatever Greenspan's reasons for not addressing the issue, the ambiguous result of the Oct. 19 hearing makes it clear that neither Congress nor Gonzalez will soon drop the subject of Fed reform. Roth was shaken by the hearing and warned that the Fed soon must accept the political and practical necessity of releasing more information about the FOMC's deliberations.

Interestingly, the Fed Board of Governors' staff in Washington has engaged in quiet negotiations in order to fashion a legislative ``compromise'' that would leave the board nominally autonomous, while further restricting the independence of the regional banks. This would do greater damage to the Fed's independence than would releasing FOMC transcripts.

The Fed's ``independence'' comes, in large part, through the regional Federal Reserve Bank presidents, who are removed from the day-to-day influence of Washington's political stew. Whereas the Fed's board in Washington can be relied upon generally to toe the line from the White House and the majority party in Congress, the regional bank chiefs, who are appointed by the privately elected boards of directors of each Federal Reserve Bank, are genuinely feared because they occasionally tell the truth in public, a mortal sin in modern Washington.

Any deliberation within the FOMC already is compromised by the executive branch's influence over the board of governors, who are presidential appointees. The governors, in turn, lord over Fed operations. The board's staff even censors regional Fed Bank publications! On Oct. 21, for example, the Washington Post discussed how the Fed's Washington staff killed an article written by Kevin Kliesen, an economist at the St. Louis Fed, and Mike Belongia, formerly of the St. Louis Fed and now in academia. Ironically, the paper the two men wrote effectively refutes the East Coast Establishment's old argument that disclosing certain types of information would increase ``volatility in financial markets.''

The Fed needs less congressional reform and more transparency. Members on both sides of Capitol Hill mistakenly focus on the legal and political structure of the FOMC in consideration of monetary reform. Naturally, Greenspan and the presidentially-appointed governors wish to keep FOMC meetings secret.

Were minutes released immediately, dissenting voices from the regional banks, who usually err on the side of conservatism and low inflation, would gain greater prominence and popular support.

Greenspan and appropriate Fed officials should be subpoenaed, put under oath, and asked, again, about transcripts, minutes, or any other post-1976 descriptions of FOMC deliberations.

Summaries of FOMC meeting minutes should be published no later than a week after such meetings. This change would bring monetary policy out of the 19th-century secrecy that encourages corruption and illegal bailouts for big banks and foreign countries.

Also, Congress should reclaim control of the Fed from the Treasury by conducting annual audits of the Fed and the 12 Reserve Banks through the General Accounting Office.

Finally, Congress needs to explicitly forbid the Fed board staff from censoring scholarly works and commentaries written by officers of the 12 regional banks.

Prompt disclosure of FOMC meeting results and free discussion of policy threaten neither market stability nor the Fed's independence. But the prospect of a greater role for the White House or the Fed's politically pliable Fed Board over Reserve Bank operations process could undermine international market confidence in Washington's ability or even willingness to maintain a measure of price stability in the age of giant fiscal deficits. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHELCSPS.COM.

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