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Correction to This Article
A March 17 Business graphic incorrectly identified Donald L. Kohn as the president of the Federal Reserve Bank of Kansas City. He is a member of the Fed's board of governors.
Hanging on Whose Words?
With Greenspan's Departure, Other Fed Players Loom Large

By Nell Henderson
Washington Post Staff Writer
Friday, March 17, 2006

Bill Poole, who?

That would be William Poole, president of the Federal Reserve Bank of St. Louis and one of several central bank officials who has gained a bigger share of the spotlight now that former chairman Alan Greenspan has stepped down.

Greenspan had so dominated Fed policymaking in recent years that Wall Street parsed his words most intensely for clues about the central bank's take on the economy and plans for adjusting interest rates, giving his colleagues relatively short shrift.

But last year, as Greenspan's departure approached, financial analysts, traders and investors began studying more closely the public comments of the other six Fed board members and 12 regional Federal Reserve Bank presidents, all of whom sit on the Federal Open Market Committee, the central bank's top policymaking group.

Greenspan's often cryptic comments still affected the markets more than those of any other member of the group in 2005, but his dominance "dropped dramatically" last year compared with previous years, according to a recent analysis by Brian Sack, vice president of Macroeconomic Advisers LLC. Sack measured the movement of the yield on the two-year Treasury note following each committee member's public speeches, congressional testimonies and interviews with the media.

The chairman's total impact was only about twice as large last year as that of the next most market-moving Fed official -- Poole, a former Brown University economics professor and Reagan administration economic adviser. From late 2001 through 2004, by contrast, Greenspan's impact had been more than six times that of the second-place market mover.

One possible explanation is that the markets believed "the committee was going to become more democratic once Greenspan departed, and hence began to pay more attention to the comments by other FOMC members," Sack wrote.

"Such a change in the committee's dynamics would be natural with any new chairman. But it might especially be so in the case of [new Fed Chairman Ben S.] Bernanke, because we believe that he will truly want to run the committee as a committee, one in which rate decisions are determined by a true policy discussion among the committee members," Sack said.

Bernanke, who served as a Fed board member from 2002 through early 2005, ranked second in market influence in Sack's pre-2005 sample.

As chairman, Bernanke's words will undoubtedly get more attention and reaction from the markets than those of the other committee members, Sack wrote, guessing that "his dominance will fall somewhere between Greenspan 2005 and Greenspan pre-2005."

The top five market movers on the committee in 2005 were Greenspan, Poole, Fed board member Donald L. Kohn, Dallas Fed Bank President Richard W. Fisher and New York Fed Bank President Timothy F. Geithner, Sack found.

Kohn is a 35-year veteran of the Fed and one of its most influential strategists on monetary policy, the use of interest rates to guide the economy. Geithner is the Fed's primary liaison to Wall Street.

And Fisher triggered the largest single market reaction to any FOMC member's comments last year when his remarks in a CNBC interview last spring led many investors to conclude erroneously that the Fed was close to halting its series of increases in its influential benchmark short-term interest rate. Fisher said the Fed was then -- after eight consecutive rate increases -- "in the eighth inning" of that process.

Now, after 14 consecutive rate hikes since June 2004, Fed officials agreed at their January meeting that they are close to the end -- but they have not yet decided what that endpoint rate will be.

Bernanke indicated in Capitol Hill testimony last month that the FOMC is likely to raise the benchmark federal funds rate, the overnight rate on loans between banks, at least once more, to 4.75 percent at its meeting March 27-28 from 4.5 percent.

Futures contracts show the markets believe policymakers will probably lift the rate again in May to 5 percent. Higher rates slow economic growth and ease inflationary pressures by dampening consumer and business spending.

Meanwhile, analysts are scouring FOMC members' speeches for more hints of how high they are willing to go.

Chicago Fed Bank President Michael H. Moskow appeared to express support for another rate increase last week, saying in a speech, "With inflation near the upper end of my comfort zone, an unexpected increase in inflation would be a serious concern, while a decline in inflation would be beneficial."

Similarly, Janet L. Yellen, president of the Fed Bank of San Francisco, said in a speech Wednesday that fast growth and low unemployment could intensify inflationary pressures, and "additional inflationary pressures at this point would be particularly unwelcome because inflation is now toward the upper end of my comfort zone."

But Minneapolis Fed Bank President Gary H. Stern indicated that he might not favor another rate hike this month, telling Bloomberg News in a recent interview that each increase "is becoming a closer call."

Several officials have been more reticent, saying only that the decision will depend on how the economy develops.

"Our policy path over the coming period is somewhat less certain," Atlanta Fed Bank President Jack Guynn said in a speech Wednesday.

When speaking about the economic outlook, Fed officials have largely echoed Bernanke's upbeat assessment in February that the economy is off to a strong start this year and is likely to perform well in the months ahead, despite the risks of a slowing housing market and high energy prices.

"The economy is in something of a sweet spot right now," Dallas Fed Bank President Fisher said in a Feb. 23 speech.

Home prices are likely to rise more slowly this year, but that is not likely to restrain consumer spending enough to be "a significant concern," Poole said in a speech last week.

Another reason to listen to all the Fed policymakers more closely is the changing cast of characters at the FOMC, which has left analysts guessing who will be most influential in determining monetary policy.

Vice Chairman Roger W. Ferguson Jr. announced after the last Fed meeting in January that he will step down in April, triggering speculation that President Bush may elevate either board member Susan Schmidt Bies or board member Kohn to the No. 2 position.

The Fed board has gained two new members since the last FOMC meeting, Kevin M. Warsh and Randall S. Kroszner. And Philadelphia Fed Bank President Anthony M. Santomero is leaving his job at the end of this month.

The regional bank presidents are chosen by each bank's boards of directors, and the Philadelphia Fed Bank board has not chosen a successor to Santomero. Neither he nor Ferguson will attend the next meeting.

"The markets are paying much greater attention to what the other officials are saying now because we don't exactly know Bernanke's M.O.," said Richard Yamarone, director of research at Argus Research Corp. "In times of uncertainty, you have to take in as much information as you can."

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