Fed Transcripts from 2000

From the Associate Press via MSNBC comes this report about Federal Reserve meeting transcripts from the year 2000 that were just released on Tuesday after the required five years of ageing. An interesting year to be sure, the Dow peaked in January while the S&P500 and Nasdaq reached their all-time highs in March.

GDP was all over the place from the fourth quarter of 1999 until a year later - annualized growth rates came in at 7.3, 1.0, 6.4, and -0.5 during this period, but the Fed went ahead with their rate hikes.

Even with the market beginning to falter in early 2000, the Fed stuck to its campaign to push interest rates higher to slow economic growth as a way to keep inflation under control.

The Fed, which had begun pushing rates higher in June 1999, continued that campaign with three more rate increases in 2000, including a final half-point boost that left the federal funds rate at a nine-year high of 6.5 percent.

That final rate hike at the May 16, 2000, Fed meeting has been controversial, with some economists arguing that the central bank overdid the tightening just as the economy was about to slow sharply.

While some Fed policy-makers argued at the time for a quarter-point move rather than the more aggressive half-point increase, Greenspan pushed for the bolder action, the transcripts indicate.

"I believe the risks in moving 50 basis points today are not very large because I think the underlying momentum of the economy remains very strong," he said.

However, while the economy was growing rapidly in the spring quarter, it slowed abruptly in the summer of 2000.

The central bank made no further changes in rates after May and by December policymakers were debating whether the economy had slowed so sharply that rate cuts were warranted.

That doesn't sound like the same "baby steps" Greenspan that most of us know and love from his ultra-low rates and laissez-faire approach to regulating lenders in the aftermath of the technology implosion. Clearly the underlying momentum was not nearly as strong as the former Fed Chairman seemed to think it was in 2000.

And inflation? It was only two or three percent at the time, according to the statisticians at the Bureau of Labor Statistics. Just the idea of a half percent rate hike sounds so unusual after the last five years.

What was he thinking?


It seems there was a good deal of confusion during the second half of the year about whether to hold rates steady or begin bringing them back down.

Early in the year, the Nasdaq had fallen from 5000 down to around 3200 and then bounced back up to over 4000. But, by the end of the summer, the free-fall had resumed and by the end of the year, the index settled in at about half of its earlier high, and still no rate cuts.

William Poole, the president of the St. Louis Federal Reserve Bank, likened the Fed's efforts in managing the economy to a recent experience in a Boeing Co. flight simulator simulating the landing of an F-18 on the deck of an aircraft carrier.

"That means finding oneself wobbling first one way and then the other way. And I think we have some of the same concerns about monetary policy. We don't want to overreact," he said.

Greenspan prompted laughter by asking, "Did you land or didn't you land?"

He persuaded the FOMC members to delay a rate cut at the December meeting but alerted them to be near their telephones, saying he might schedule an emergency inter-meeting conference call in early January if the economy continued to weaken.

The Fed ended up cutting rates by a half point on Jan. 3, 2001, after a telephone conference call, returning the funds rate to 6 percent, where it had been before the half-point increase the previous May.

The Jan. 3 rate cut was the first of an extended series of rate cuts as the central bank worked to counteract a series of economic blows including the collapse of stock prices, the beginning of a recession in March 2001 and the impact of the September 2001 terrorist attacks.

Within a year, the Fed Funds rate went from 6.5 percent down to 1.75 percent and it wasn't until three years later that it rose back above 2 percent.

Somehow a similar pattern seems to be developing here in 2006. GDP has been erratic the last couple quarters with a strong and weak quarter to close out 2005, robust first quarter estimates, and slowing projected for later in the year.

The tightening is continuing longer than most analysts anticipated, and while it's hard to imagine that Ben Bernanke has a half point rate hike up his sleeve, if the dollar tumbles and gold continues its ascent unabated, which with each passing day seems more and more likely, you never know what might happen.

One thing is sure, half point rate cuts shouldn't be a problem for the new Fed Chairman.

After all, isn't that what American central bankers live for? To cut rates? To come in and save the day when the world needs to be saved? To mop up in the aftermath of another bubble, having given it one last jab with a pin?