Transcripts show rationale for interest rate cuts

WASHINGTON --Federal Reserve chairman Alan Greenspan and his colleagues struggled through the fall of 1998 to develop the appropriate response to a spreading global financial crisis that Greenspan called the most extraordinary event he had seen in 50 years, according to transcripts of the Fed's closed-door deliberations released yesterday.

The central bank engineered a rapid-fire series of three interest rate cuts that autumn to prevent the US economy from being derailed by the financial crisis that began in Thailand in 1997 and then spread to a number of other Asian countries and Russia.

When the crisis hit Russia in August 1998, that country was forced into a botched devaluation of its currency that rattled financial markets in the United States and around the globe.

That raised fears that the US economy might be the next to fall prey to the spreading financial crisis.

It was against this backdrop that the central bank cut the federal funds rate by one-quarter percentage point on Sept. 29, 1998 -- the first rate reduction in nearly three years.

The funds rate is the interest that banks charge each other on overnight loans and is the Fed's main tool to manage the economy.

While Greenspan and other Fed policy makers sought to portray a sense of being on top of the situation in their public comments, the transcripts showed that Fed officials were clearly worried by the unfolding crisis.

In an Oct. 15, 1998, emergency conference call, Greenspan told other members of the Federal Open Market Committee -- the group that sets interest rate policy in the United States: ''At this stage, after 50 years of looking at the economy on almost a daily basis, I must say that I have never seen anything like the current situation."

Greenspan went on to say that from his extensive readings of economic history, he believed that ''it would be an extremely rare event for this type of financial environment to emerge and eventually to recede without having any impact on the economy."

The Fed chief, during the emergency call, urged his colleagues to immediately approve another quarter-point rate cut, rather than wait for the Fed's regularly scheduled meeting a month later on Nov. 17.

They went along, although some colleagues argued that the financial markets might see another quarter-point move as inadequate.

Robert McTeer Jr., president of the Dallas Federal Reserve Bank, said on the October conference call that he would prefer a bolder, half-point cut to reassure financial markets.

''We have a Texas country swing band down here whose name is 'Asleep at the Wheel.' I would hate for the financial markets to give us that label as well," he said.

At the regular November meeting, the Fed decided to cut rates for a third time, also by a quarter-point.

The series of three Fed rate cuts produced the hoped-for result in stabilizing Wall Street and keeping the global crisis from hurting the US economy.

''I think we moved very effectively during the fall," Greenspan said at the following Fed meeting on Dec. 22.

''I believe we broke what was a dangerously eroding financial situation."

Under an agreement with Congress, the Fed releases transcripts of its FOMC meetings with a five-year time lag.

The Fed is also releasing transcripts from earlier years as those transcripts are completed.

The Fed yesterday also released transcripts for 1979 and 1980, two years when then-Fed chairman Paul Volcker and his colleagues were trying to deal with a decade-long bout of inflation by embarking on a policy that eventually pushed interest rates up to levels not seen since the Civil War.