The Road to the FOMC

St. Louis Fed President Bill Poole gathers a wealth of information and evidence – with a big assist from the Research
Division – before he makes the trip to Washington to help set the nation’s monetary policy direction.

By Alice C. Dames

Eight times a year, the Federal Reserve Board of Governors and Reserve bank presidents who make up the Federal
Open Market Committee (FOMC) gather in Washington, D.C., to set the monetary policy for the United States.  Their
mission:  to keep inflation low and productivity high—far from simple tasks in our modern world.

St. Louis Fed President Bill Poole won’t cast a vote during 2003; the Fed presidents rotate as voting members, with
four presidents serving a one-year term and the New York Fed president serving every year.  Poole’s next turn to
serve on the FOMC will be in 2004.  However, he plays an important role along with the other Fed presidents in
contributing to the discussions that shape the final vote.  His input, in turn, is shaped through extensive preparations
and analyses from the Research Division—much of which happens behind the scenes.

Coming Out of the Shadows  

Many Bank presidents in the Fed System come to the FOMC meetings with briefing books, tables and charts that
their Research departments have prepared for them.  Poole, however, prefers to use his extensive background in
research economics to personally analyze the data and form his own opinion.  

Nonetheless, the relationship between Poole and the Research Division is a close and collaborative one.  When
Poole accepted his position at the St. Louis Fed in 1998, he hand-picked Bob Rasche—who was then teaching at
Michigan State University—to serve as his Research director.   

Poole and Rasche have known each other for more than 30 years.   Both also served as members of the Shadow
Open Market Committee (SOMC), the most prominent voice of monetarism outside of the St. Louis Fed.  (See
sidebar, which appears at the bottom of this page.)

Behind Closed Doors

For security reasons, much of Poole’s preparation for each FOMC meeting takes place behind closed doors.  Yet he
says there is little mystery to how he prepares for each meeting.  

“I begin my preparation by thoroughly examining the current data,” Poole says. “I print out a lot of statistical reports,
and as I examine the numbers, I highlight the things that stand out.  When I see a surprise, I’ll ask Research, ‘What
do you think of this?  What’s going on here?’”

Poole receives his answers during a closed-door FOMC briefing with the Research Division’s economists and
analysts.  The briefings, usually held in the large Research conference room the week before each FOMC meeting,
consist of several components: an analysis of the regional District economy, a discussion of the briefing book, the
presentation of position papers and the policy debate.

During the briefings, research economists take the most visible role; however, a great deal of their preparation
comes from their research analysts (RAs).  RAs perform specialized support tasks such as gathering data,
summarizing research and reports, running computer programs, organizing the economic results and preparing

Senior RAs Heidi Beyer and Tom Pollmann compile the “briefing book,” a summary of the District’s economic
activity.  Abbigail Chiodo, another senior RA, writes the book’s regional section, which provides an overall picture of
the Eighth District’s economy.  Economist Howard Wall then approves or amends the content for the regional section.

The Great Policy Debate

After the Research staff members have discussed the briefing book with Poole and analyzed the regional economy,
several economists present position papers.  The idea for the position papers came from the Shadow meetings, and
Poole brought the concept with him when he came to the St. Louis Fed.  

During the presentations and the debate that follows, several economists take a position on whether the FOMC
should change the target for the fed funds rate (up or down) or leave rates unchanged.   Poole listens intently to
each side of the argument, and often asks how the economist came to a particular conclusion.  During these
discussions, however, Poole never states his own position—for several reasons, he says.

“Although I usually have formed an opinion before I attend the briefing, I always want to hear the very best case for
the position opposite mine,” Poole says. “I also try to attend each briefing with an open mind.  I’m often surprised by
what occurs during the actual FOMC meeting.  Sometimes the debate will change my mind about how I should vote.

“I also think it’s very good practice for economists to think through opposing viewpoints.  This is the best way to
ensure that you’re confident in your argument for one policy move or another, or at least as confident as you can be.”

According to Rasche, confidence is critical. “During the debate, economists win or lose points based on their
conviction and the logic they bring to their arguments.”

Economists may choose to argue one position when the schedule is made in January, and then they find that the
economy has changed radically when it’s their turn to present that position later in the year.  Sometimes this means
that economists have to defend an argument they “are not intellectually committed to,” says Rasche.

Economists Mike Pakko and Dave Wheelock found themselves in this situation during the December 2002 briefing.  
Both had to argue positions that they did not agree with, yet neither found it difficult to argue an opposing view.

Says Pakko:  “By the time it’s my turn to present an argument, I’ve often convinced myself that the position I’ve been
assigned to defend is valid.  During the debate, my peers may be skeptical and try to shoot holes through my logic,
but afterwards, we still go to lunch together.”

Adds Wheelock:  “When an economist looks at the most recent data and compares it to current events, it’s very rare
that the data will all be pointing to the same policy direction. Likewise, it’s important to remember that the formal data
only provide a partial picture of the current economy.”

Data:  The Human Dimension

To supplement what the formal research cannot explain, Poole gathers unscientific, anecdotal information.  Poole
compiles the information through  reading media reports, talking to bankers about current economic conditions and
emerging trends, and collecting personal accounts from executives across the District.”

Admits Poole, “I have a more academic take on things.  I often find that the most valuable information will come from
the people who have a lot of day-to-day experience in the markets.”

Poole carries that perspective with him when he meets with his peers at the FOMC.

“Every Fed president has different professional experiences and thoughts about monetary policy, and every Fed
president represents a different region of the country,” Poole says.  “But in the end, we only have one national
monetary policy, and that’s what we’re all there to represent.

“If we’re not going to pay attention to what our colleagues say, and there’s nothing they could possibly say to lead us
to a different view, then we might as well save the airfare and just e-mail our votes to Washington.”

Sidebar: What Is the Shadow Open Market Committee (SOMC)?

In 1971, President Nixon yielded to pressure from the business community and imposed wage and price controls.  
The decision also was supported by Congress and many economistsincluding Treasury Secretary Connelly and
New York Fed President Arthur Burns.  

Monetarists, however, strongly opposed the move.  They believe that monetary policy can best be implemented by
controlling growth rate (supply) of money, rather than movements in interest rates or other economic indicators
(such as price controls). In response, economists Karl Brunner and Allen Meltzer enlisted about a dozen economists
throughout the nation to sign a statement opposing the price controls.  Their efforts produced an Op-Ed piece in the
Wall Street Journal.

But Brunner and Meltzer didn’t think that their statement garnered enough attention.  So, in 1973, they decided to
form a group of dissenting economists, calling themselves the Shadow Open Market Committee.  Although the
membership of this group has changed throughout the last three decades, it is still very much in existence.

SOMC members meet twice a year, and their purpose is educational.  The SOMC’s proceedings are open to the
press  there is no secrecy whatsoever. Debate is encouraged; however, no dissention is allowed.

The SOMC’s current home is William E. Simon School of Business at the University of Rochester,