The Post's Bob Woodward on the Federal Reserve
Thursday, January 4, 2000; 2 p.m. EST
Responding to a slowing economy, the Federal Reserve decreased interest rates for the first time in two years in an effort to avert a serious downturn. The unexpected half-point rate drop sent the markets soaring on Wednesday.
Bob Woodward, author of Maestro: Alan Greenspan's Fed and the American Economic Boom is assistant managing editor at The Post. He will join washingtonpost.com to discuss how the Federal Reserve works and the recent interest rate cut, Thursday, Jan. 4; 2 p.m. EST.
The transcript follows.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live
Online discussions and choose the most relevant questions for guests and hosts;
guests and hosts can decline to answer questions.
Good afternoon Mr. Woodward and welcome. Yesterday's decision by the Fed to cut interest rates caught many by surprise. The committee just met on Dec. 19 and choose not to lower rates. What possibly could have
happened over the past two weeks to make them act so abruptly rather than wait for the scheduled Jan. 30/31 meeting?
Bob Woodward: First, it was not that surprising that they cut the short term interest rate yesterday. It was inevitable. It was coming. The main question was when. Clearly, the recent bad economic news and recession talk helped spur Greenspan and company to action. But, Greenspan is attempting to execute a so-called "soft landing" -- meaning slowing the economy but avoiding a recession. This means taking his foot off the brakes and lowering rates. And that is what happened yesterday -- more or less in line with the execution of interest rate policy in the period 1994 to 1995. These actions laid the foundation for the economic boom of subsequent years.
Staten Island, N.Y.:
Greenspan has proven an ability to detach or purposefully distance himself from political alliances, therefore, do you think the timing of the cuts (pre-inauguration) considering the next Fed board meeting was scheduled for 1/30, was in some part attributed to his desire not to be seen as holding off this cut until a Republican was president ?
Bob Woodward: Basically the decision yesterday was driven by economics, not politics. The chief audience is the American consumer and businessman -- all of whom have been feeling the squeeze of the economic down-turn. So it is a giant political and psychological statement, though it has political impact. The sequence of raising and lowering interest rates to moderate boom and bust business cycles virtually dictated a rate cut sometime in last December or this month.
My question is whether you think higher interest rates were primarily responsible for bringing inflation under control in the early eighties, given that this would only reduce the introduction of new capital into the system by reducing the demand for it, or is it more likely that trillions of dollars of government borrowing (which was generally spent to support further growth in the private sector) had a more substantial impact on the surplus of capital in the system at the time? And might ignoring this possibility limit our understanding of the ramifications of our current actions?
Bob Woodward: First, Fed Chairman Paul Volcker, who served from 1978 to 1987, is generally credited with bringing runaway inflation out of the American economy. I agree that the rate hikes were necessary and accomplished their goal. Greenspan and his colleagues are very worried about outbreaks of 1970-style inflation which drove interest rates above 20 percent. That is the ghost that stalks the halls of the Federal Reserve. So there is a caution in most of their actions. This caution has been on display when rates were hiked to 6.5 percent last year and the unusually high rates maintained until yesterday. This is all part of an inflation-fighting strategy, while at the same time attempting to keep the economy expanding and growing and avoiding the dreaded recession. No one knows whether it will work or how far rates might have to be lowered. I suspect Greenspan has a plan, but even he cannot be sure because of unexpected economic or political or other events.
Montgomery County, Md.:
There are lots of reports on what the Fed has done (e.g. raised or lowered interest rates), but few explanations on just how this happens (do all of the reporters know??). Any suggestions of a good source of an explanation on how the Fed accomplishes what it does?
Bob Woodward: I have attempted in my book, "Maestro" to explain the process and the reasoning and the debate with inside the Fed for some 13 years of interest rate decisions. I could try to summarize, but frankly I hope the book does it better.
Is the discount rate set differently from the fed funds rate, and, if so, why?
Bob Woodward: These are technical questions, but generally the key interest rate setting committee is called the Federal Open Market Committee or FOMC. It has 12 voting members -- all 7 governors of the Federal Reserve plus 5 Federal Reserve bank presidents. The discount rate is set and changed by a vote of the 7 governors, but it has little impact these days. The key interest rate is the so-called fed funds rate set by the 12-member FOMC. Both are chaired by Greenspan.
What was the most surprising thing you learned about the Fed when writing Maestro?
Bob Woodward: The extent to which Greenspan dominates the institution, though he only has one of 12 equal votes on the key interest rate setting committee. In addition I was struck, as a reporter, that Greenspan played such an important role in most of the various crises or economic decisions made since 1987. On lots of the international financial crises, such as Mexico, Asia, Russia etc., he played a significant behind-the-scenes role. Also, the extent of the alliance of President Clinton and Clinton's economic advisors was not as clear to me at the beginning, but that alliance turns out to be one of the important economic relationships perhaps ever between the Executive branch and the Federal Reserve.
As I lay in bed awake last night, I began to wonder if 1/2 a percent was too much and just how much the U.S. Fed can influence influence world interest rates. Aren't the Fed's monetary policy tools somewhat held in check by the actions of European and Japanese national banks? Are they following the U.S. Fed's lead yet?
Bob Woodward: The relationship between the world central banks is complicated and frankly one I don't understand that well. The focus of my work was on the American Federal Reserve, which clearly plays a dominant role in world markets. On the subject of the 1/2 point interest rate cut, it was clearly designed to send a very dramatic message to the American economy, consumers and businesses to let them know that the economic slow-down has been noted and the Federal Reserve will act to assist with more moderate credit conditions.
Is our economy in a very serious recession as some economists predicted? In your opinion, what really triggered the Fed to move with the surprise short-term interest rates cut? What are the immediate short-term effects of the cut?
Bob Woodward: That's a series of good questions. The short-term impact is mostly psychological, suggesting that interest rates are going to be cut. But the actual impact on the economy will take months or even a year or more. But so much of consumer confidence buying and business investment decisions need strong confidence as a key underpinning. There is no evidence that I know of that the economy is truly in recession, but clearly the economy has slowed down abruptly. The main question is will there be at least some positive growth.
East Hartford, Conn.:
I have heard that Alan Greenspan is opposed to the idea of big tax cuts that would limit our ability to pay down the national debt. Presumably he told Bush this in their meeting a couple of weeks ago. Yet Bush has not let up on his insistence on big tax cuts.
What is your read on what is going on between these two? What would be your guess as to Greenspan's assessment of Bush's grasp of economic issues?
Bob Woodward: I don't have any idea Greenspan thinks about Bush's grasp about economic issues. But Greenspan has made it clear in public many times that he believes for economic reasons that a federal government surplus should first be used to pay down the debt. This is because no annual deficit and lower overall debt mean lower overall long term interest rates which are the key and the engine of business expansion and growth. Second Greenspan has made it clear that if the money is not used to pay down the debt it is desirable to return it to the tax payers in the form of a tax cut. He prefers tax cuts to more government spending. But the clear preference is paying down the debt. I suspect, but do not know that he has made these arguments to President-elect Bush and Vice President-elect Cheney. The other element that is critical to understand is that Bush has talked about a tax cut plan that is back-loaded. That means the big cuts would not take effect until 2002 to 2006. No one knows what the economic conditions will be in those years and locking the government into a tax cut policy which may or may not be appropriate so far down the road would make little sense according to Greenspan's normal thinking.
Could you please explain how the Fed's policy is implemented via the New York Fed trading desk operations?
Bob Woodward: Technically the Federal Reserve will buy or sell some of it's tens of billions of dollars of treasury bonds to manipulate the short-term interest rate. But because the interest rate changes are announced the day they are made, and anyone who understands the technical power to drive short-term interest rates, interest rates will move to the new announced interest rate almost instantly. Again this has to do with the psychological power of Federal Reserve decisions and the knowledge those who trade government bonds have that the Federal Reserve can surely implement it's policy if necessary.
Tysons Corner, Va.:
Good afternoon, thanks for taking my question. It appears that the recent rise--and fall--of "dot-com" businesses are responsible for the market's volatility over the last few months. Viewed without these stocks, the market still seems relatively stable, and minor slips could be considered market corrections to compensate for last year's economic surge. Is it possible that the Feds are over-reacting with such a major step as cutting short-term interest by one-half percent, and couldn't this put us in renewed danger of inflation?
Bob Woodward: Obviously Greenspan and his colleagues disagree that the economic troubles are driven by dot-com depression. The dot-coms are not that significant a part of the overall economy and the business expectations of many old and solid new economy businesses virtually prove that we are in an economic slow-down. So the issue is the overall economy and not just a small segment. I have heard no one suggest that the Fed's action was too much too soon. The main objection has been that interest rates should have been lowered last month or even earlier that that.
When does an "economic slow down" become a "recession."
Bob Woodward: Another excellent question. In technical terms a recession is defined as two quarters of negative growth. That means there must be a 6 month period where the economy fails to grow but also shrinks. The last recession was 1990-91 and it was brief and modest in comparison to other recessions. There are some economist who argue that recessions are not only inevitable, but desirable because they ring excesses out of an economy that is running too hot. It's clear to me that Greenspan wants to avoid recession, but I found in my reporting in some of the transcripts of the key interest rate committee meetings show that Greenspan is not so horrified by the thought of a recession that he would not let one occur if he thought it was the only way to bring the economy into overall balance so the supply and demand for goods was about the same. In one meeting he noted recessions always end and he has made it clear he would prefer the continuing expansion and I suspect is working day and night to inform himself so they make decisions with that goal in mind.
Los Angeles, Calif.:
President-elect Bush's choice of ALCOA head Paul O'Neill (allegedly a close friend of Chairman Greenspan) to head the Treasury Department seemed unconventional because of O'Neill's lack of Wall Street experience and the fact he represents the old economy. type of executive. Was it O'Neill's relationship with Greenspan that caused his selection?
Bob Woodward: I think it was O'Neill's broad government and private business experience plus his association with Dick Cheney back in the 1970s that led to the appointment. I think the evidence that's available shows that both Greenspan and President-elect Bush want to have a positive working relationship, and both no doubt at least at this point, want to avoid the acrimonious relationship Greenspan had with Bush's father -- particularly 1990 to 1992.
I am in the process of reading your book on Chairman Greenspan, and I just wanted to tell you that I am really enjoying it. The time, energy and thought that goes into raising or lowering the interest rate is remarkable. My question is did much of the detailed information in the book come from the Chairman or did you have other sources?
Thanks for taking the time to respond.
Bob Woodward: I had many, many sources -- most of whom declined to be named in the book. But everyone I think accept that it is an authoritative account derived from those who made the decisions, participated in them or witnessed them. I would love to disclose all of the sources but the agreement was that I would not. This allowed me to get detailed, inside accounts and information that none of the people were willing to provide on the record with named sources.
What is your opinion on this being a good time to buy a car, sell those tech stocks, refinance homes? How is it that Alan Greenspan can affect all of these kinds of decisions?
Bob Woodward: Advise on buying and selling cars or stocks is way above my pay grade and it would be inappropriate for me to make any such suggestions. But by controlling the interest rates, or at least the short term interest rate, Greenspan and his colleagues are able to determine the basic credit conditions in the country, but that has significant limits because if the economy is not producing, no manipulation of interest rates would make it occur. But interest rates impact the buying and selling decisions of consumers -- someone buying a home, refinancing a mortgage, expanding a business, hiring new employees or firing new employees. Over the last decades interest rates have become more and more important because more people consume more and invest more. In addition the visibility of the interest rate decisions and the credibility that the Federal Reserve has established in this society caused their interest rate decisions to be amplified and seen as an index of overall economic conditions.
What did we do before Greenspan? What are we going to do when he retires/moves on?
Bob Woodward: Greenspan serves his fourth term until the year 2004. He'll be 78 at that time and it's anyone's guess whether he would be offered or would accept another term. He clearly loves the job and is currently in good physical and mental health. But all engines eventually run down and anything can happen. But the lessons of the Greenspan era could easily be learned and even improved upon by successor chairmen. One of the things I tried to do in my book, "Maestro," is show that it's complicated and often technical, but there is no real secret or mystery other than being willing to do a lot of hard work and being flexible and open to new ideas, information and theories. But it's pretty clear to me that we live in a Greenspan era, at least as far as the economy is concerned. When that ends is anyone's guess.
Los Angeles, Calif.:
Mr. Woodward: Obviously you've had a remarkable post-"All the President's Men" reporting career. Now that you are (somewhat) older, do you think someone like Harrison Ford or Michael Douglas would be a better pick to play you in the sequel than would Robert Redford? Have you auctioned the movie rights already?
Bob Woodward: I am speechless and decisions about casting in movies are truly out of the hands of everyone except Hollywood directors and producers. But I do indeed agree that I have aged and I feel it regularly. The real question is who should play Greenspan. And frankly that has got me stumped. Maybe Gene Hackman might be able to carry it off with a lot of work. Robert Redford has aged also, maybe he can play Greenspan.
Are Fed governors presidential appointments? Will the Bush administration appoint anyone at the central Fed if it branches in the years ahead?
Bob Woodward: The chairman and all governors are appointed by the president and must be confirmed by the Senate. There are 2 to 3 openings on the current board of 7 members. But as my research show Greenspan plays such a dominant role that membership on the board of governors, though important, is not anything like a Supreme Court appointment. Again, that could all change with time and there might come a day when the board is divided and the chairman does not dominate and the new appointments to the board would be scrutinized more thoroughly -- publicly and politically - that they are. But the Federal Reserve looks at itself as an institution that operates independently and on sound economic principles largely above politics.
I'm concerned that every time President-elect Bush mentions the economy, he speaks of a potential "tailspin" or recession. Is he motivated out of genuine concern for the economy or is he only trying to create an environment where a questionable tax cut gains popularity, and where a return to economic normality isn't blamed on entirely him?
Bob Woodward: I think it would be inappropriate to try to assess President-elect Bush's motives. I do think and accept at face value that his concern is genuine. After all there is a lot of evidence -- and Greenspan's and the Fed's action yesterday was only the latest -- that the economy was slowing. But Bush is necessarily also playing politics as he should. Bush's tax cut proposal was a key part of his campaign. And, I believe he spoke with conviction when he said that he believes that tax rates are too high. But what occurs in the next weeks, months, year on this issue is going to be complicated and probably have unanticipated twists and turns.
Los Angeles, Calif.:
When you were writing your book, "Maestro," did you have any resistance from insiders who were opposed to your investigative reporting?
If so, why do you think there is such secrecy behind the Federal Reserve?
Bob Woodward: There is always resistance to any reporter's effort to get a full story, but I had the luxury to spend months or years on these projects. And eventually most people involved want to make sure that a story is complete and accurate rather than incomplete and inaccurate. But I always wonder what I or other reporters don't find out. Often the unwritten story is greater than the written, and that is what gives me gas pains and keeps me up at night.
That was our last question for The Post's Bob Woodward. Thank you to Mr. Woodward and to all who participated.
If you want to keep up with the latest political headlines and live online discussions, be sure to register for the OnPolitics daily email.
Automatically Update Page
Get New Responses
© Copyright 2001 The Washington Post Company