When two Federal Reserve officials dissented from a decision to leave interest rates unchanged at their September meeting, rumors began to spread about a split within the central bank's top policymaking group, the Federal Open Market Committee. Some Fed observers suggested a simmering revolt against Fed Chairman Alan Greenspan, who led the majority that did not want to cut rates in September.
But this week's aggressive half-percentage-point reduction in the FOMC's target for overnight interest rates, and details of the Sept. 24 meeting, minutes of which were released yesterday, indicate there was far less dissention within the committee than those observers thought.
According to the minutes, several other officials said at that policymaking session that they were not strongly opposed to a rate reduction, but with all the uncertainty surrounding the economic outlook, they wanted to wait for more evidence that growth was weakening.
"Several members indicated that if compelling evidence of a weak economy were to materialize they would be prepared to ease promptly," the minutes said.
When the FOMC next met on Wednesday of this week, some of that evidence was in hand. The number of payroll jobs fell in both September and October, while factory output and new orders for durable goods declined in September. Importantly, consumer spending also dropped in September.
The result this week was a unanimous 12 to 0 vote to cut the committee's target for overnight interest rates, to 1.25 percent, to give the economy a boost.
The vote at the September meeting had been 10 to 2. The two committee members who wanted to cut rates at the previous meeting were Edward M. Gramlich, a member of the Fed's Board of Governors, and Robert D. McTeer Jr., president of the Dallas Federal Reserve Bank. They argued then that as the economic expansion was losing momentum and job growth was weak, "the potential cost of additional stimulus seemed low compared with the risk of further weakness."
Not only was the result of Wednesday's meeting unanimous, but the rate cut was twice the quarter-point reduction most analysts and investors had expected. Some observers had suggested that if there were a split within the FOMC, that would more or less dictate a quarter-point reduction as a compromise between those who wanted a large cut and those who wanted no cut at all.
Given the process by which a consensus for action is achieved within the committee, however, it is most likely that Greenspan led the way to the larger cut while making it clear in the wording of the FOMC's announcement that the half-point cut was not the beginning of a series.
In September, the minutes said, the committee decided to emphasize the increasing importance of what it called "heightened geopolitical risks" as a key reason the recovery from last year's recession has fallen short of expectations, the minutes explained. The phrase was a reference to the possibility of war with Iraq, although the country was not mentioned by name. The threat of war, the committee minutes said, "appeared to constitute a major source of the uncertainty currently prevailing in the economy."
In the committee's view, the uncertainty about a war had replaced the uncertainty created earlier in the year by the wave of corporate accounting scandals, the minutes indicated.
"If the geopolitical uncertainties were to ease significantly along with what already were apparently diminishing concerns about corporate governance issues, the resulting improvement in business and consumer sentiment could generate a more robust economic expansion," the minutes said.
The statement issued after this week's FOMC meeting said the committee concluded that "incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production, and employment."