Greenspan said a statement would be possible.
Blinder said he thought a statement would be essential if the entire committee were going to vote for a _ percent hike.
After about fifteen minutes of discussion, Greenspan agreed and left. He had promised Blinder a statement of some kind, and Blinder in turn gave the chairman his vote.
Greenspan knew that Blinder had essentially issued an ultimatum. Ultimatums were not useful around the Fed.
At the August 16 FOMC meeting, Greenspan, Blinder and the others gathered in the second-floor meeting room at the Fed. For more than an hour, Greenspan led a discussion on the state of the economy. Committee members talked about the economic performance they saw, ranging from hot to middling to even somewhat cold -- reflecting the sometimes wide variation of economic activity in different geographical areas.
"Let me get started," Greenspan said, after everybody had spoken. "A statistic we don't talk about very often," Greenspan said, "...is the extraordinary rise in net business formation." New business formation had taken a "fairly sharp upswing" an event that is not consistent with an economy that is in its final and declining stages. A sharp upswing in business formation showed that the momentums in the economy were hardly slowing, as some had argued.
The situation as a whole made Greenspan nervous. "This stuff is really beginning to move," he said.
"I think one has to conclude, as far as policy is concerned, that another upward notch in rates is clearly called for at some point," he went on. If they moved _ percent now, the chairman said, the chances were better than 50-50 that they would not have to increase rates any further before the end of the year.
"I'm a little concerned that _ a point would merely raise the issue of when the other shoe is going to drop," Greenspan continued. He offered his personal assessment of the market reaction to a _ point raise: "My own view -- I'm being a little more detailed than I usually am, so I hope people will excuse me in this respect -- is that it's very important if we were to do _ a point, that we not give the impression that somehow we anticipate major accelerations and this is just the beginning of a long series of _ percent increases...I think we have to be very careful to avoid giving that impression. The only realistic way we can avoid that is to issue some type of statement." The statement could declare the Fed's "intention to hold for a while without tying our hands, which we cannot do."
Pleased that Greenspan was living up to his agreement, Blinder thought there was now a fighting chance that this might be the last needed rate increase.
"The more I think about that as a potential sort of policy package, the less I like all the other alternatives," the chairman concluded.
"I just want to take two minutes to emphasize that it really is a package," Blinder said shortly after the chairman had finished. "So with such a strong statement, I not only support but support enthusiastically the suggestion of the chairman." Just in case his point was missed, he added, "Without it, I would not."
Greenspan read a draft of a proposed statement, which stated vaguely that the Fed expected the rate hike to be sufficient "at least for a time." That could mean months, or to the end of the year, but the chairman knew that it could also mean precisely 4 minutes and 37 seconds -- or less. In other words, the statement meant almost nothing.
Greenspan called for the votes on the _ percent increase, to be accompanied by the statement.
The vote in favor was unanimous. After the meeting, Greenspan complimented Blinder, and told him that he had earned his pay.
The interest rate hike caused rallies in the stock and bond markets, where traders saw the Fed's half point hike as a strong offensive against inflation. It angered some Congressional Democrats and others who believed that the rate hike risked sending the economy into a severe downturn.
Copyright © 2000 by by Bob Woodward, Simon & Schuster
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