Alan Greenspan has a real puzzler on his hands.
The national economy grew at a torrid annual rate of 5.8 percent in the fourth quarter of 1999 and unemployment fell to a low of 4.0 percent in January, causing the Federal Reserve chairman to raise benchmark interest rates in order to slow down growth and thwart inflation.
But statistics show inflation still at a relatively benign 2.7 percent in December.
So what guides Greenspan in whether to apply the brakes? At least in part, it's a group of business people in Los Angeles who have a little-known degree of influence on federal monetary policy.
They are the directors of the Los Angeles branch of the Federal Reserve Bank in San Francisco, and they report monthly on important trends in the regional economy.
"If the Federal Reserve had to wait for retail data from the Department of Commerce to find out what's happening in the economy, they'd be running behind the facts," said Lonnie Kane, president of Karen Kane Inc. and chairman of the L.A. branch. "I know first-hand what's going on in retail here, as well as what's going on with imports and labor costs in the apparel industry."
Looking at local indicators
Kane is one of seven directors who make up the board of the L.A. branch, which oversees banks in Southern California, parts of Central California, Arizona, and the Las Vegas region in Nevada. Five of the directors are based in Los Angeles, and the other two are in Phoenix and San Diego.
"Los Angeles is the largest zone that any branch serves, and geographical representation is one of the things we look at in selecting directors," said Mark Mullinix, senior vice president and manager of the L.A. branch.
The directors' main responsibility is to prepare monthly written reports on what they see as significant economic developments, which are used to supplement the data the Fed receives from various branches of government.
"What we try to get at are the local currents that might cause inflation to heat up," Mullinix said. "These include prices for raw materials, labor costs, and housing costs, for example."
The directors' reports, together with those of other Federal Reserve branches and their directors, are summarized in the so-called Beige Book, and can be used by the Board of Governors of the Federal Reserve in Washington, as well as by the Fed's Open Market Committee, in determining monetary policy.
That's not to say Greenspan and the Open Market Committee will give any special consideration to what the people in Los Angeles say.
"Regional issues are not going to shape monetary policy, unless the directors here report something that is going to have a widespread impact elsewhere. For example, if the San Pedro harbor is not doing any business all of a sudden," said Aris Protopapadakis, associate professor of finance and business economics at the USC Marshall School of Business and a former vice president of the Federal Reserve Bank in Philadelphia.
But L.A.-area directors still believe their points of view carry weight when Fed officials ponder monetary policy.
"This is not a small Midwestern branch, but the ninth largest economy in the world," said Liam McGee, Bank of America's president for Southern California, who is in his second three-year term on the board. "The (Fed's) Board of Governors certainly pays attention to what we have to say, particularly when we meet with Chairman Greenspan in Washington once a year, or when he comes to Los Angeles."
Role with interest rates
Besides preparing reports, the directors also give a non-binding recommendation on the discount rate, the interest rate the Federal Reserve Bank charges commercial banks. This recommendation goes to the board of directors of the Federal Reserve Bank in San Francisco, who in turn vote on what they think the discount rate should be. The Board of Governors makes the final decision on whether to act on the recommendation of the boards of the various regional Federal Reserve banks.
The directors of the L.A. branch are nominated by Mullinix. The final decision on whether to accept those nominations rests with two parties: the board of directors of the Federal Reserve Bank in San Francisco, which appoints four directors, and the Board of Governors in Washington, which appoint the other three.
Although they do not have to sign a waiver, it is understood that they are not to divulge sensitive information to outsiders, particularly because they have access to Greenspan's personal views about the national economy.
"Greenspan can be very open in private conversation, and his level of frankness is directly dependent on the level of media coverage he gets," said Mullinex. "We all know that a casual remark attributed to him can move markets, so we have to be extremely careful how we present that information to the world."
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