Oluwasegun Popoola

Book Review

Title of material

Meyer, Laurence H.“A term at the Fed,” HarperCollins, first edition, 2004.

Introduction

Perhaps, Laurence H. Meyer‟s book „A term at the Fed‟ was an attempt to informally document
and demystify happenings and events in the Federal Reserve1 - an otherwise formal and iconic
institution that reminds one of the emergence of the economic prowess of the United States in the
20th century.

Laurence Meyer served as a member of the Board of Governors of the Federal Reserve from June
20, 1996 until January 31, 2002. He was widely recognized as an influential member of the
Federal Open Market Committee (FOMC)2 and built a reputation for independent thinking and
straight talk about monetary policy. Fed Chairman Alan Greenspan said, “Larry Meyer has made
an important contribution to the Board‟s monetary policy. His thoughtful insights into technical
issues and his technical expertise have materially enhanced the deliberations of the Board and the
Federal Open Market Committee. His influence will carry on beyond his tenure as a Board
member.”

Today, Dr. Meyer is a Senior Adviser to Macroeconomic Advisers (MA) 3 and offers Monetary
Policy Insights in cooperation with MA.

1
The Federal Reserve was created in 1913. Membership is opened to the seven Federal Reserve Board
Governors and the Presidents of the twelve Federal Reserve Banks.
2
The voting members of the FOMC consist of the seven Federal Reserve Board Governors and five of the
Presidents of the twelve Federal Reserve Banks (although all twelve participate in FOMC meetings).
3
Macroeconomic Advisers was co-founded by Dr. Meyer, Chris Varvares, and Joel Prakken in 1982 as
Laurence H. Meyer and Associates (LHM & A) and Dr. Meyer served as President and Chairman of LHM
& A from 1982 to 1996.

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Structure of the Federal Reserve

The role of Central banks or Reserve Banks world wide is basically grouped into regulatory,
supervisory, consumer protection and broad policy objectives such as ensuring price stability and
full employment in the economy. The role of the United States‟ Federal Reserve is not entirely
different as the (FOMC) is responsible for making monetary policy decisions.

The Meyer Years

The author‟s writings on the aftermath of the September 11, 2001 attack highlighted the
importance of New York and its pivotal role in the economic survival of the United States. One
can suggest that the actions of the Federal Reserve after the incidents communicated a strong
signal that the Federal Reserve could contain the situation and act rapidly to instill confidence in
the economy and prevent an economic downturn.

Other events which shaped Meyer‟s term at the Fed include the extraordinary and unexpected
productivity growth recorded by the United States which began in the mid-1990s, Russian default
of 1998, Long – Term Capital Management (LTCM) failure of 1998, the equity bubble burst of
early 2000, economic slowdown of 2000 and the recession of 2001.

Has the ‘New Economy’ arrived?

This question characterized the mid-1990s as economic watchers marveled at the economic
miracle which was been wrought in our eyes. It is largely regarded as an anomaly for decreasing
unemployment rate at least below the Non accelerating inflation rate of unemployment (NAIRU) 4
not to be associated with increasing inflation5.

Meyer‟s insistence on the NAIRU concept is at best quite disturbing (emphasis mine) even
though he gradually conceded on his estimate of where the threshold of hyper inflation might be:
a rationale which unfortunately always made him fear the worst. As unemployment fell, he would
argue that inflation was around the corner. As a result, he came to be known as one of the
4
NAIRU is an estimate of unemployment rate that does not trigger inflation. Therefore, any fall below the
NAIRU triggers inflation and as a result, monetary policy theorists suggest a preemptive tightening of the
federal funds rate to check inflationary tendencies.
5
Stable inflation at a higher unemployment rate is clearly better than a continuing and accelerating rise in
inflation at a lower unemployment rate.

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proponents of rate increase interestingly not because inflation was rising, but only because his
model told him that it soon had to6.

The uncertainty about what was driving this mysterious development made it pretty difficult to
set a particular inflation rate target7 at the FOMC meetings.

By the late 1990s, there was a growing consensus that productivity growth was responsible for
the sustained fall in the unemployment rate and stable or sometimes declining inflationary levels 8.
However, there were questions on the sustainability of the productivity growth rate and whether
this was a temporary situation or a structural change in the economy with a permanent bias.

The Global Financial Crisis

The Asian economic crisis which began in Thailand in 1997 had a „contagion‟ effect on other
countries‟ economies. At its peak, the crisis led to the Russian default of 1998 and caused the
crash of Long-Term Capital Management (LTCM).

The spread of the crisis eventually had its effect on the US markets as the Dow fell a record 554
points on October 27, 1997 making it the third biggest points‟ loss in its 110-year history. No
doubt, the full effects of globalization had taken its effects on the world economy as a repeat of
the same event only happened about a month ago when the Dow fell owing to the crash in the
world financial markets which began in China.

6
Excerpts from “An insider’s account of the Greenspan machine”. Please see references page.
7
Please note that inflation target in this case is merely to assist the committee in arriving at a monetary
policy direction for the economy and not for public disclosure or use.
8
Productivity improvements directly lowers the growth of unit labor costs. Recall that % change in unit
labor cost (ULC) = % change in wage rate - % change in productivity rate.

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The Economic Slowdown cum Recession

By 1999, the concern was whether the growth that had begun in the mid-1990s was sustainable.
The majority position on the Fed was that there was need for the Federal Reserve to intervene
directly as there were fears that further declines in the unemployment rate9 would spark inflation.

There was widespread discussion on achieving a soft landing10 through transparent11 monetary
policy making for the economy as a result of the foregoing. Eventually, the slowdown turned into
a recession which by all accounts lasted for about two quarters.

The Greenspan Effect

Meyer at the end of his book sets the tone for an extensive discussion of the „Greenspan effect‟
describing how the distinctive nature of the former Fed Chairman influenced the latter‟s approach
towards monetary policy decision making.

In the US News magazine of 2005, Mortimer Zuckerman, the Daily News owner asserted that
“Greenspan emerged as a kind of Rock of Gibraltar, inspiring confidence in financial markets here and
abroad. His success lay in a unique ability to understand the psychology and mechanics of markets and
business, to sift what mattered from a mountain of data, and to avoid being locked in by experts or inflation
targets.”

Conclusion

Meyer‟s attempt at explaining his term at the Fed only helped improve the public perception o the
Federal Reserve widely regarded as a closed temple with little or no inside revelation about its
operations and structure. The language, style and approach also make monetary policy study
more attractive to first time students.

9
Decline in the unemployment rate reduces the pool of skilled labor thereby leading to a tightening of labor
supply and an attendant increase in wages. This decline in unemployment rate if unmatched by an equal or
higher productivity growth rate will spark inflation.
10
An attempt at ensuring that the twin objectives of low or steady unemployment and inflation rates are
attained as the economy slows down.
11
The dire need for transparency in monetary policy influenced the movement towards the use of risk
assessment language to communicate change in monetary policy direction.

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References

Galbraith James K., “Fed Ache: An insider‟s account of the Greenspan machine,” Washington

Monthly, July/August 2004.

“The Greenspan Era: Lessons for the future”, “Federal Reserve Bank of Kansas City, 2005

Economic Symposium, August 25 -27, 2005.