Where It All (Should Have) Started

It was late on a Friday night in early September 1997. Because his speech was given at Stanford University out in the Pacific Time Zone just as the weekend was about to commence, market watchers were bated with almost frenzied anticipation. Alan Greenspan had come to be seen as more than just a monetary policy bureaucrat. He had conquered the bond market with his 1994 massacre and was leading, nay, controlling the entire US economy with such skilled input it was the very example of simple elegance.

Not even a year before showing up on the West Coast, Greenspan had captured everyone’s attention with those two little words. It was only December 1996 when he uttered “irrational exuberance.” At the time, everyone thought he was talking about the stock market. People today still believe that.

With visions of bubbles fresh on everyone’s mind, the Asian flu and LTCM not yet clear enough over the close horizon, the Wall Street media expected the Federal Reserve Chairman to deliver another doozy. With markets long since closed that day, and two whole days until Monday, he was free to be less, well, Greenspan. Perhaps he would set aside the Fedspeak at least for one minute.

Instead, the speech he gave was mostly about monetary statistics. Milton Friedman was in attendance, and the big debate of that age wasn’t dot-coms it was rules-based policy. Some like Friedman criticized the Fed for just winging it; they were constrained only by imagination, which many saw as a dangerous proposition.

Forgive us, Greenspan said, how else are we supposed to conduct ourselves?

Increasingly since 1982 we have been setting the funds rate directly in response to a wide variety of factors and forecasts. We recognize that, in fixing the short-term rate, we lose much of the information on the balance of money supply and demand that changing market rates afford, but for the moment we see no alternative. In the current state of our knowledge, money demand has become too difficult to predict.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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