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Opening Doors at the Federal Reserve Bank BY DEBORAH LUTTERBECK “In the future, we have to be more forthcoming. If we keep stonewalling, we’re going to be in trouble.” Robert D. McTeer, president of the Dallas Federal Reserve Bank, during an October 15, 1993, conference call with Federal Reserve policymakers. FEW PUBLIC OFFICIALS rival Federal Reserve policymakers when it comes to claiming sanctity of mission. This is understandable; as the nation’s central bank, the Fed’s reach extends from corporate decisionmakers to unemployed grocery clerks. For more than 17 years the Federal Reserve has justified conducting its deliberations and making decisions in private. If you wanted to know what the Fed was up to, you either had to have access to a Wall Street guru or wait six week for the central bank to release its Federal Open Market Committee Meeting minutes. That changed on February 4; when the Fed appeared to make a very public concession to the dogged Chairman of the House Banking Committee, San Antonio Democrat Henry B. Gonzalez. The story of how the Fed came to change its way of doing business is more a tale of a failed cover-up than one of newfound enlightenment. And while it might be difficult to determine exactly when the Fed’s journey began, it is fair to say that the Fed’s forced march toward new openness has been very much influenced by Gonzalez. Gonzalez was not the first member of Congress to call on the Fed to change its practices, but he has certainly been one of the most persistent. Recently he has introduced H.R. 28, the so-called Federal Reserve Accountability Act of 1993, which among other things, would require the Fed to promptly disclose any changes in its monetary policy. “As I have suggested in the past, prompt disclosure lets all market participants know what the Fed is doing,” Gonzalez said in a statement from the floor of the House in early February. “It should be vastly preferred to the previous method of releasing the directive five or six weeks after the Fed has made its monetary decision,” he said. Deborah Lutterbeck is a writer for Common Cause magazine in Washington, D.C. Fed officials have consistently balked at suggestions that they open the doors to their discussions. The arguments were always the same if the Fed is forced to far into the public arena, its deliberations would be constrained, which could have costly economic consequences. In the words of Fed Chair Alan Greenspan during a hearing last fall, “Holding open meetings of the FOMC or releasing a videotape, audio tape or transcript of them, would so seriously constrain the process of formulating policy as to render those meetings nearly unproductive.” Just what goes on at the FOMC meetings has been something of a mystery since 1976. At that time, then-Fed Chairman Robert Burns stopped releasing detailed accounts of Fed meetings and the FOMC, whose 12 members include five of the Fed’s regional bank presidents \(they rotate, with the New York the seven governors of the Federal Reserve Board in Washington, adopted the practice of issuing “policy directives” some six weeks after their meetings in a document that the House Banking Committee staff characterized as “vague, useless, and a poor substitute” for a full account. In H.R. 28, Gonzalez called on the Fed to release full transcripts of the meetings transcripts Fed officials as late as October 19 said did not exist. On that date, 16 Federal Reserve officials testified before the House Banking Committee and two others submitted written testimony. Although they had been asked about their knowledge of notes, material or records kept by Fed policy makers, none of the witnesses informed the committee that the Fed kept full transcripts based on tapes made during the closed-door meetings of its deliberations . Not one Fed official disclosed the fact that the tapes existed a topic that had been under much discussion several days earlier during a private conference call held by Fed members. Gonzalez’s committee staff discovered an October 15 conference call that established that Fed officials not only knew of the full transcripts and the tape recording system, but they even discussed plans to prevent their release. William McDonough, the president of the New York Fed, even discussed destroying the material. “After the Memorandum of Discussion,” he said, “…we could destroy the material. We could give ourselves some protection of just saying the amount of work involved. We could say it’s too old to be interesting. See if that would fly.”It was dur ing that same meeting that the Dallas Fed’s McTeer warned about potential stonewalling. He proved to be right. Armed with notes from the conference call, Gonzalez issued a counter-attack. He called for a full accounting from the Federal Reserve officials and they came back with an offer to release edited transcripts with a five-year lag. Gonzalez called that move unacceptable, but it certainly marked a dramatic shift in the Fed’s approach. There was more to come. As it turned out, although Fed officials had been loathe to let the public in on their thinking, they were accommodating select representatives of the press. According to further testimony, in at least 11 of 32 Federal Open Market Committee meetings, decisions were leaked to the Wall Street Journal, a revelation that made the Fed’s cries for secrecy lack some force. The Fed’s weakened position became all the more apparent .on February 4, when for the first time in its history the Fed announced that it had made a change in its funds rate the overnight rate banks charge to each other and one of the most delicate tools the Fed uses when it wants to change policy. Unlike the discount rate, in which changes are always announced, the Fed fund rate has heretofore been a much more delicate instrument and so-called Wall Street Fedwatchers can spend lifetimes debating what is the real level of the funds rate. On February 4, that changed. The press release that was issued sounded innocuous enough; it simply said, “The Federal Open Market Committee decided to increase slightly the degree of pressure on reserve positions.” The release went on to say, “The decision was taken to move toward a less accommodative stance in monetary policy in order to sustain and enhance the economic expansion.” The big news was that the Fed had slowly come around to disclosing its activities, although Fed officials have indicated that it was one-time occurrence. As for Gonzalez, while he almost applauded . the Fed’s new-found openness, he attacked the central bankers’ decisionmaking. He asked 8 MARCH 11, 1994