Sat, May 18, 2002 page19

• Dissenters are becoming dying breed at the Fed

  It appears the imposing figure of Alan Greenspan at meetings of the US Federal Reserve is more than enough to persuade other members to keep their mouths shut

  • By Caroline Baum / BLOOMBERG
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  Trolling for a column topic, I came upon a voting history for the Federal Reserve's policy-setting committee on Stone & McCarthy Research's service on the Bloomberg terminal.

  The first thing I noticed was that dissent had gone the way of the dodo. Including the eight scheduled meetings a year and any inter-meeting policy adjustments, there were no dissents this year, three last year, none in 2000 and two in 1999. Compare that with the 11 dissents in 1992, seven in 1993, five in 1994 and six in 1998.

  The question, then, is this: Has a stable inflation environment contributed to a more harmonious view of policy? Or does the lack of dissent suggest Greenspan has consolidated his power after almost 15 years as Fed chairman?

  "There's a lot less disagreement than there was 15 years ago -- even five to 10 years ago -- about what the Fed ought to be looking at," says Lou Crandall, chief economist at Wrightson & Associates.

  In the late 1980s, using auction-market indicators -- the slope of the yield curve, the foreign-exchange value of the dollar and commodity prices -- as a gauge of policy gained some adherents, courtesy of then-Fed Vice Chairman Manuel Johnson.

  Some of the Federal Reserve District Banks (Cleveland and Richmond) were traditionally known for their strict monetarist leanings, focusing on the supply of money.

  Today, however, "no one would base a dissent on the price of gold, as [former Fed governor Wayne] Angell did once," Crandall says. "There's a much more consistent mindset: an output gap, or resource utilization, framework." The output gap is the difference between how fast the economy can grow (potential GDP) and how fast it is growing (actual GDP). The fact that no one knows what potential GDP is makes an output-gap model akin to a shot in the dark.

  That's why resource utilization -- of labor and industrial capacity -- has become a kind of shorthand for potential GDP.

  It wasn't too long ago that economists thought an unemployment rate below 5.5 percent would generate inflationary pressures. That was before the unemployment rate fell to 3.9 percent in 2000.

  Inflation did double, with the core CPI rising from 1.4 percent in early 2000 to 2.8 percent in November last year. But that's not what the theory of a constantly accelerating rate of inflation once unemployment falls below a certain level would suggest.

  Perhaps the waning dissension is a symptom of the personalities on the Federal Open Market Committee.

  "The nature of the people on the FOMC -- they're team players," says Paul DeRosa, a partner at Mt. Lucas Management Co.

  "Fewer are looking to establish their own reputation."

  Larry Meyer, who left the Fed in January and had enough intellectual fiber to challenge Greenspan, is a perfect example.

  Meyer never dissented from the policy decision in his 5 1/2-year term as a governor. When I asked him in March about his reticence to take on the chairman in spite of his strong belief that inflation would accelerate with the unemployment rate so low, he said he "thought it would have been counterproductive for me to dissent," given the media's desire for a story on the dissension between the two.

  Instead, Meyer chose to "use my efforts to try to shape the consensus and get the policy that I wanted" within the confines of the policy debate.

  Some see a more sinister side of the seeming uniformity of views at the Fed.

  "The ultimate sign that Greenspan has control over the Fed is the decision to release the voting record immediately at the end of each meeting rather than wait until the minutes come out six weeks later," says Jim Bianco, president of Bianco Research in Barrington, Illinois.

  It was at the March 19 meeting that the Fed, in its own words, took another baby step "in the direction of greater transparency" by deciding to include the vote on monetary policy and the dissents in its press release following each meeting.

  Conspiracy theorists cried foul: surely this was an attempt by Greenspan to dissuade dissent. But as Wrightson's Crandall points out, the tough part is telling the chairman to his face that you disagree. "After that, facing the public is easy," he says.

  Yet another possibility has to do with the nature of the motivating events for policy themselves. Inflation was a problem in the 1970s and early 1980s. The '90s was crisis management.

  "Policy changes in recent years have been driven by extraordinary events not seen on a regular basis," says Henry Willmore, senior US economist at Barclays Capital Group.

  Those events included the near-collapse of hedge fund Long-Term Capital Management in the fall of 1998, Y2K, "which may have delayed tightening," the collapse of the stock market bubble and of course Sept. 11, Willmore says.

  "I'm sure there's a tendency to defer [to the chairman] when faced with one-time unusual events," he says.

  Lots of theories, none of which can be tested, unfortunately.

  There's no control study. There are too many moving parts.

  Besides, the biggest variable -- Greenspan himself -- isn't leaving anytime soon. At this rate, he may never leave.
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