Greenspan Talks, Wall Street Balks; Less Secrecy at Fed

The veil of secrecy has come slowly off the face of the Fed, but not everyone likes what they see.

Members of the Federal Reserve's Open Market Committee once took great pains to cloak not only their decisions on interest rates but the reasoning behind them.

The process now, while far from transparent, allows in more light.

For example, Fed chairman Alan Greenspan, on May 8, gave an unusually detailed explanation, and defense, of the Fed's interest-rate increase in March. That decision drew mounting criticism because of minimal signs of inflation.

Mr. Greenspan decided his critics "deserve a response." In an unusually detailed defense in a speech at New York University, he said: "While there is scant evidence of any imminent resurgence of inflation at the moment, there also appears to be little slack in our capacity to produce."

The speech and its tone astonished Wall Street.

"Uncharacteristically defensive," opined Stephen Roach, chief economist of Morgan Stanley & Co. in New York. He wrote "the Fed may be caving in to political pressures." If so, he noted, that would be "the ultimate insult for well-intended central bankers."

Greenspan also said containing inflation was not "an end in itself."

The remark appalled Mr. Roach, himself a former Fed staffer. "I cannot recall an instance when the nation's leading central banker emphasized [economic] growth and watered down his anti-inflation stance to this degree."

Allan Meltzer, an economist at Carnegie-Mellon University in Pittsburgh, wishes Fed officials would say less. He says the comments make financial markets more volatile.

The Fed should simply state principles for monetary policy and follow them, he argues.

Some observers are less suspicious of the new openness. Economist Chris Varvares figures Greenspan is simply following the example of Laurence Meyer, a new Fed governor and previously Mr. Varvares's boss at Macroeconomic Advisers in St. Louis.

Just before leaving for Washington, Mr. Meyer read "Secrets of the Temple," a 10-year-old book that criticized the Fed for secret policymaking.

The Fed has since opened up considerably. For example, it now announces decisions on rate changes the day they are made instead of six weeks later, as when the book was written.

Varvares says Meyer decided that "Monetary policy is too important to be left in the temple."

The level of interest rates, of course, touches on the economic lives of every American borrower and investor.

Meyer explained in an April 24 speech why he supported the Fed's decision to boost rates on March 25.

Meyer didn't say how he will vote tomorrow. Fed officials don't do that. But Wall Street decided from his explanation that he would support another 0.25 percentage point increase in short-term interest rates.

As a result, bond prices fell. In turn, that slightly depressed stock prices. Meyer's talk touched, at least briefly, many pocketbooks.