Statement by William J. McDonough, President, Federal Reserve Bank of New York, before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, October 19, 1993
You invited me to appear before the committee to present my independent views regarding the accounting of Federal Open Market Committee (FOMC) meetings. As you know, it is not possible for me to appear at the hearings, but I submit herewith my views, as well as the answers to three questions to me in your letter of September 20.
I believe that the primary responsibility of the Federal Open Market Committee is to develop and carry out a monetary policy that contributes to sustained economic growth with price stability. Therefore, I address myself to the question before us guided essentially by whether the present accounting of the FOMC meetings is more or less supportive of that responsibility than would be the case under the provisions proposed in the legislation being considered, H.R.28.
Besides serving as president of the Federal Reserve Bank of New York and vice chairman of the FOMC, I also bring to this consideration a period as Manager of the Federal Reserve System Open Market Account with responsibility for the day-to-day execution of FOMC decisions. In the hope of adding some specialized value to the committee's consideration, I will direct my consideration to the market effect of one aspect of H.R.28, release of the policy decision of the FOMC within seven days as compared with the releases of the directive the Friday after the subsequent meeting, that is, with a delay of about seven weeks.
We all may have differing views either in general or from time to time regarding the right direction of monetary policy. But whatever these views, the actual carrying out of monetary policy in the best interest of the American people must involve flexibility. Why?
It is frequently the case that the right monetary policy conclusion is not an immediate change in policy. On occasion, the FOMC decides that there should be a tilt between meetings towards a shift in monetary policy; that tilt may or may not result in an actual policy change, depending on how circumstances in the economy and in financial markets play out. The present policy of releasing the minutes and the directive after the following meeting permits this flexibility because by the time of release under the present policy, it is a clear fact whether policy has been changed or not.
A person who has not spent much of his or her life in these markets may say that nothing would be lost by immediate disclosure. That is simply not so. I can assure the committee, based on more than two decades of private sector experience in financial markets, that the disclosure of an FOMC policy tilt would be translated by the financial markets, in moments after the release, to an execution of the policy shift. A policy change that the FOMC thought might make sense only if certain economic circumstances evolve would become an executed policy as market participants acted instantly to either profit or avoid loss. …