WASHINGTON -- Behind the Federal Reserve's decision last week to make no change in monetary policy were two momentous developments inside this most secretive government institution. First, Chairman Alan Greenspan, nearing the end of his protracted tenure, reasserted control after recent shaky performances. Second, an ideological struggle began inside the central bank that could influence the U.S. economy far into the future.
Greenspan's strength was seen in the Federal Open Market Committee's (FOMC) decision Oct. 27 to not only retain low short-term rates but keep them for a "considerable period" -- despite the desire of the Fed's influential staff to eliminate those two words. That also represented movement toward an "inflation standard" in determining monetary policy, diminishing power of future Fed chairmen and bureaucrats.
Although today's Federal Reserve is almost transparent when compared with its opaque past, what goes on behind closed doors in its marble palace remains cloaked in mystery. The events last week were especially shrouded by Greenspan's desire to avoid the impression of controversy in his final years and an important doctrinal debate between two remarkable new Fed governors.
These two governors both took office Aug. 5, 2002, ending years of humdrum appointments to the central bank that reflected Greenspan's wishes. One new governor was Ben Bernanke, the 48-year-old chairman of Princeton University's economics department and the most distinguished economic theorist on the Federal Reserve Board in recent memory. Bernanke was a rare Fed nomination originated in the White House, not by Greenspan. The other new governor was 59-year-old Donald Kohn, a Fed staffer for 35 years and Greenspan's right-hand man the last 15.
Bernanke has long advocated setting inflation targets to determine whether the central bank should tighten or loosen. Not wishing to offend Greenspan, the rookie governor has argued that this will help the next chairman, who would lack the magical finesse of "the maestro." An inflation standard would threaten the central bank's aura of mystery and its world-famous staff's actual power. Kohn, who did not become only the third member of the Fed's bureaucracy ever to be a governor just to preside over its diminution, opposes targeting inflation.