Greenspan Yields in Spat With Fed Officials on Rates

Federal Reserve Board Chairman Alan Greenspan has given in to demands that he consult more closely with other top officials in the Federal Reserve before he cuts interest rates, Fed officials said Tuesday.

Sources said Greenspan, in an effort to smooth relations within the Fed, has settled an internal dispute with the presidents of the board’s 12 regional banks over his authority to independently set interest rates.

A Greenspan spokesman confirmed that the Fed chairman has agreed to consult more closely with the regional presidents on interest rate policy in the future. Fed spokesman Joseph R. Coyne said the informal accord has resolved the dispute.

Some of the regional presidents had expressed growing concern over Greenspan’s recent tendency to slash interest rates without waiting to discuss his actions with the Fed’s policy-setting Open Market Committee. The committee, which meets behind closed doors in Washington about every six weeks, is made up of regional bank presidents and members of the Fed’s board of governors.

Sources said the dispute over the procedures Greenspan has used to cut interest rates reflects a sense of frustration among the regional bank presidents over their influence on monetary policy at the Fed.

While there has been broad consensus within the central bank over the direction of policies pursued by Greenspan since the recession began last fall, sources said several regional bank presidents believed that the chairman’s independent actions were subtly undercutting their authority and the importance of the Open Market Committee.

“It’s a procedural issue, and not a substantive one,” Coyne said. “There is no disagreement over policy.”

At the last meeting of the Open Market Committee in late March, sources said, Greenspan and the regional presidents reached an informal agreement calling for the chairman, under certain circumstances, to consult with them more closely when interest rates needed to be cut.

Greenspan agreed that when the Fed’s seven-member board of governors votes to raise or lower the benchmark discount rate, he will place a conference call to the regional presidents to discuss whether to make an immediate corresponding cut in the separate federal funds rate.

The discount rate is the interest that the Fed charges for loans to commercial banks, while the federal funds rate is the interest that commercial banks charge each other for overnight loans. The federal funds rate is largely determined by the Federal Reserve through its intervention in the credit markets, and the Open Market Committee is supposed to vote on major changes in the rate.

But faced with a rapidly worsening economic slump, Greenspan has moved quickly in recent months to cut the federal funds rate on his own, rankling some members of the Open Market Committee who believed that their role in policy-making was being undermined.

“Several presidents (at regional Fed banks) expressed concern over that,” one senior Fed official said.

Although the Open Market Committee gave Greenspan wide latitude to act on his own late last year, some Fed officials said that now the economy seems poised for a recovery, he should consult more closely before reducing rates further and threatening a revival of inflation.

“When you are at or near a turning point (from recession to recovery), you are going to have greater disagreements over what should be done,” noted one Fed official.

Despite their dispute, senior Fed officials said that Greenspan has been much more accommodating to other Fed policy-makers, and has sought to include them in decision-making more than his predecessor, Paul A. Volcker. Sources said that Volcker, a master of bureaucratic infighting, often set Fed policy by fiat, stifling debate and dissent within the board of governors and the Open Market Committee.

“Volcker was unique in his ability to divide and conquer,” observed one Fed source.

By contrast, even those who disagreed with Greenspan on his rate-cutting authority said he has been far more open and democratic than Volcker and has given the regional bank presidents more of a voice in Fed policy than they had before he came. Several added that the dispute over Greenspan’s authority never became bitter, and they insisted that the Fed has not been split into warring camps over the issue.

Still, Greenspan’s willingness to give the regional banks a greater say may come back to haunt him. Indeed, on Tuesday regional presidents began to openly criticize a Greenspan-approved plan to allow the Federal Deposit Insurance Corp. to create a $25-billion line of credit at the Fed for emergency use in case the government’s bank deposit insurance fund runs dry.