Before he joined the Fed, Blinder had several encouraging conversations with the chairman. Greenspan indicated that the board was shorthanded, needed help, and would welcome Blinder.
In the period after his nomination, Blinder followed his own press clippings carefully. The initial press coverage was flattering. Though a piece in The New York Times characterized Blinder as an inflation dove who "does not see inflation as a problem," most of the stories, like the Associated Press piece on the day of his Senate confirmation, noted that the appointment "could put him in line" to succeed Greenspan as chairman. Other stories dubbed Blinder Greenspan's "likely successor," and one story in Investor's Business Daily included a brash prediction from the chief economist at a large Wall Street firm: "A new coalition will form around Blinder. I think this is the beginning of the end for Greenspan." Because Blinder was the first Democratic appointee to the Fed in more than 12 years, the press simply assumed that Blinder would vie for the chairmanship with the Republican Greenspan, whose term was set to expire in March of 1996.
Blinder knew that no vice chairman had ever ascended to the chairmanship. When the press began to talk about him as Greenspan's heir, Blinder said little to fan the flames, but he also made little effort to extinguish them. He said nothing about the press coverage to Greenspan, and the chairman, who had been following the news reports, did not raise the subject.
On the morning of June 27, 1994, the day after his official confirmation in the Senate, Blinder and his wife, Madeline, arrived at the Fed building on Constitution Avenue. Greenspan swore Blinder in as vice chairman, and photographers snapped pictures of the new Fed leadership team. After the ceremony ended, the chairman said he had arranged for two governors and some staff to take Blinder to lunch -- and then walked out the door. Good-bye.
Blinder wasn't sure what to make of it all, but his wife told him that the reception seemed ominously cold. On day one, minute one, the chairman was out the door as soon as he could be. What could it mean?
On August 16, several days before Blinder attended his second meeting of the Fed's key interest rate-setting committee, the Federal Open Market Committee (FOMC), Greenspan's secretary called him to say that the chairman was coming over to see him.
Greenspan appeared promptly. "This thing," the chairman said, referring to the overall economy, "is heating up." He made it clear that he wanted to raise the rate that the FOMC controlled, the so-called fed funds rate, by _ percent at the next meeting.
Blinder said that he thought (?)% percent would be sufficient. That was the standard Fed increase, and Blinder saw no need for more, given that the Fed had already raised rates four times since the beginning of the year.
Greenspan disagreed. The economy was hot. The chairman indicated, in no uncertain terms, that more than the normal increase was required.
Blinder was less concerned about individual rate increases than he was about where the Fed would wind up in this series of increases. Where was this going? How much was enough? What would tell them when to stop? Blinder was in favor of keeping inflation low, but he was worried that the Fed might be headed toward overkill, a crash instead of a soft landing.
The FOMC didn't like to accompany its rate decisions with any clear wording, Blinder knew. Zero wording -- implying that the rate decision could speak entirely for itself -- was beautiful in the world of the Fed. But Blinder thought that the Fed needed to explain itself if it were going to raise rates by _ percent. He asked Greenspan, If the _ percent raise were inevitable, would it be possible to issue a statement declaring that the Fed would go to the sidelines after the rate hike, indicating that no immediate additional rate increases would be forthcoming?
Copyright © 2000 by by Bob Woodward, Simon & Schuster
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