By weaving firsthand stories about the challenges of policy making, Meyer takes a revealing look at the people and politics of the Fed, one of the world's most powerful institutions, by one of its governors.

Acknowledgments

ix

Preface

xi

Introduction

1

(184)

1 Getting There

11

(20)

2 Come with Me to the FOMC

31

(24)

3 Hawks and Doves

55

(24)

4 Temporary Bliss or Permanent Bliss

79

(22)

5 Global Financial Turbulence

101

(22)

6 It's Productivity, Stupid!

123

(12)

7 Irrational Exuberance

135

(16)

8 Landings

151

(20)

9 What Happened to the New Economy?

171

(14)

10 New Challenges

185

(14)

11 Looking Forward

199

(10)

12 Alan, I Hardly Knew You

209

(12)

Appendix

221

(12)

Notes

233

(22)

References

255

(2)

Index

257

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A Term at the Fed
An Insider's View

Chapter One

Getting There

By the time I had completed my first economics class in college, I knew I wanted to be an economist. One attraction was that a career as an economist appeared to offer such a variety of opportunities and challenges: teaching, research, consulting, and serving in government. In addition, one didn't have to make a single choice within this set: One could pursue several options simultaneously or sequentially. By age fifty, I had already been a teacher, researcher, and consultant. Never for a day have I regretted my career choice.

But I had two unfulfilled dreams. The first was to play second base for the Dodgers. The second was to be chairman of the President's CEA, a position of stature and some influence and an ideal spot for an academic economist seeking an opportunity for public service. For some inexplicable reason, though, the Federal Reserve never made it into my dreams. And that's despite the fact that, in retrospect, it was truly the ideal spot for me.

In any case, in September 1995 I was sitting peacefully at a conference in Washington, D.C., organized by my consulting firm, when my adventure began. My partner handed me a note saying that Laura Tyson, chairman of President Clinton's National Economic Council would like me to call her. My consulting firm had worked with the Clinton administration's economics team, as we had with the Bush and Reagan administrations' teams previously, so such a call, though unusual, didn't suggest anything out of the ordinary.

When I slipped out and returned the call, our conversation seemed innocuous enough. There were some openings on the Federal Reserve Board, and Laura asked me for some suggestions about possible nominees. She also asked if I would like to be considered for the position, but I viewed the latter question as more of a courtesy than serious inquiry. I quickly provided a list of several potential candidates and gave no further thought to the possibility of being nominated.

But this call was indeed the beginning of the process that would result in my nomination and confirmation. Once I was nominated to the Board, incidentally, I was frequently asked, How does someone get to be on the Federal Reserve Board? The technical answer is, You have to be nominated by the President and confirmed by the Senate.

But to me, the question usually sounded more like How did someone like you get to be on the Board? The answer, generically, is really quite simple. It depends on some combination of whom you know, what you have accomplished, what your party affiliation is and what you have contributed in support of your party. The relative importance of these considerations differs depending on the President and on his economics and political teams.

In my case, I knew most of the economics team that would make the decision; I had been a professor of economics at Washington University in St. Louis for twenty-seven years; I was an award-winning economic forecaster; and I was a valued consultant to several administrations, including the current one, as well as to the Board of Governors itself. In addition, I was widely recognized as a Democrat and modestly outspoken in support of Democratic positions on economic policy. My consulting firm had even earned a gold star by doing a much appreciated piece of policy analysis for the Clinton presidential campaign. So I had the credentials.

The next important event toward my nomination was a call from Joseph Stiglitz, chairman of the President's CEA. Joe told me that I would be on the administration's short list for the Fed position, provided I would commit to accepting the nomination if it was offered. Even though Laura Tyson had hinted at this possibility in the earlier call, Joe's call came as a total shock. I was immediately excited about the prospect of serving on the Board -- and thrilled to have been asked.

But while it may seem hard to believe, I nevertheless didn't exactly jump at the opportunity. My first thought was about the prospects of my consulting firm and my two partners. They had taken all the risks in starting the firm. At the time, I was a tenured professor at Washington University. If the firm failed, I still had a nice position there. As a result of this asymmetry in risk taking, I felt I had an obligation to them. I told Joe I would think about it and talk to my partners.

Chris Varvares and Joel Prakken had been graduate students of mine at Washington University. Joel had gone on first to the Federal Reserve Bank of New York and then to IBM, where he had helped refine IBM's macroeconomic model. I had lusted after a large-scale model with which to do policy analysis and forecasting ever since my graduate school days at MIT, in fact, where I worked as a research assistant with Franco Modigliani (later a recipient of the Nobel Prize in economics), who was developing a large-scale model of the U.S economy.

Chris, meanwhile, had taken a leave from the graduate program to serve on the staff of the CEA. Working at the CEA is a great opportunity to broaden and deepen one's knowledge of economics, and Chris benefited enormously from this experience. He was also a computer guru. This was perfect. One partner would bring the model, the other would know how to get it running and make it available to clients. And both wanted to start a firm with me.

By the way, I have a confession to make. The firm was started under the influence of, not alcohol, but drugs. I had a herniated disk and was ordered by my doctor to stay in bed and take Tylenol with codeine. The medication not only controlled the pain, it also made my mind incredibly clear. I wanted to work sixteen hours a day. So I snuck into my office and worked standing up at a tall filing cabinet. I began to dream of starting a forecasting firm with Chris and Joel. Not long after, Joel called and said, "Guess what? I'm quitting my job at IBM and coming to St. Louis to start a forecasting firm ...

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