Greenspan first cringed at Rubin's 'strong dollar' slop but grew to love it

From Dow Jones Newswires
via CNNMoney.com
Tuesday, May 15, 2007

http://money.cnn.com/2007/05/15/news/economy/s_dollar.dj/index.htm?secti...

WASHINGTON -- Fed chairman Alan Greenspan told his colleagues back in 2001 that he had "cringed" every time Treasury Secretary Robert Rubin repeated his "mantra" during the Clinton administration that the White House supported a strong dollar.

"Bob Rubin used the mantra about the strong dollar to a point where all of us who had to sit and listen invariably cringed more and more as the weeks and months went on," Greenspan said in a conference call with other Fed officials.

But Greenspan also conceded that he gradually became a fan of Rubin's strong dollar comments because it paralyzed the press.

"It was boring, it was dull, it was repetitive, it was nonintellectual -- and it worked like a charm," Greenspan said.

"It turned out to be exactly the right policy approach because what happened was that by not varying the statement, an issue never arose about whether a comment involved a subtle change or not in the policy toward the dollar," Greenspan said.

Greenspan's comments became public as the Federal Reserve released on Tuesday the verbatim transcripts of its rate policy meetings from 2001. After congressional investigators uncovered that the Fed was recording its policy meetings, the central bank agreed to release transcripts of the meetings after a five-year lag.

The calendar year 2001 was certainly an eventful one for Fed policy-makers. They slashed rates by 50 basis points at a surprise Jan. 3 meeting as the economy showed signs of falling out of bed and continued to ease rates through August. The central bank was then severely tested by the challenge of restoring financial market stability following the Sept. 11 terrorist attacks. The Federal funds target rate started the year at 6 percent but ended at 1.75 percent.

Greenspan's remarks about Rubin's communication technique came at the first meeting of the year, the unscheduled conference call on Jan. 3 that took place amid signs that the economy was weakening swiftly.

William McDonough, the president of the New York Fed, reported to his colleagues that "the markets and the leaders of major firms in the world are at or near a point of psychological crisis."

He said there was a deep sense of gloom about the outlook for the U.S. economy that was starting to feed upon itself, creating the risk of a dramatic slowdown in growth.

Greenspan noted that the rate of growth was declining, with no signs of stabilizing.

"We are in the position of the person falling off the 30-story building and still experiencing a state of tranquility at 10 floors above the street," Greenspan said.

Fed officials quickly agreed to the 50-basis-point rate cut, but grappled with the issue of how much to tell the press.

McDonough informed his colleagues that the New York Fed would quickly push for another rate cut at the next FOMC meeting, set for Jan. 31.

But Greenspan told his colleagues not to talk with the press if reporters ask about the next meeting, or, if need be, imitate Rubin.

"I would suggest to you that your inclinations to be thoughtful, conceptual, and interesting be suppressed," he said.

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