FEDERAL RESERVE OFTEN TOSSES OUT IMF ADVICE ON ECONOMIC POLICY
By Michael M. Phillips Staff Reporter Of The Wall Street Journal
WASHINGTON -- Which country has received the worst economic advice from the International Monetary Fund over the past few years? South Korea? Russia? Brazil?
Think again. It might be the U.S.
Just as they do for every member nation from Mozambique to Pakistan, IMF experts give the U.S. economic team an annual once-over. Every year IMF chief Michel Camdessus sits down to lunch in the Fed's executive dining room and coaches U.S. Federal Reserve Chairman Alan Greenspan on interest-rate policy. Time and again in recent years, the IMF has laid out an aggressive game plan -- the Fed should boost interest rates to stave off the threat of inflation.
Time and again, the Fed has nodded politely and, for the most part, left interest rates alone. And for the last few years, the U.S. economy has continued to hum along.
Diplomatic Terms
"I wouldn't say" IMF advice "has a heck of a lot of weight -- I wouldn't say it's ignored either," one U.S. official observes diplomatically.
A less diplomatic version of the play: Camdessus to Greenspan to trash can.
The annual ritual highlights one reason the IMF, the international financial fireman, is in such political trouble in Washington these days. The IMF's track record, particularly in scandal-ridden Russia, has made it an irresistible target for Republicans jostling for position in the 2000 presidential race. Right or wrong, critics think the IMF gives bad advice. And, they say, if it can't give sound advice to the U.S., what hope is there for the poor countries that count on the IMF's steady hand?
"The prescriptions they recommend are almost uniformly bad," says GOP presidential hopeful Steve Forbes, who plans to call for the IMF's abolition on Monday in Bretton Woods, N.H., where the institution was born in 1944. "They're like Typhoid Mary. Wherever they go, riots and depression seem to follow."
Certainly, that's hyperbole. To be fair, many economists think the IMF has prescribed harsh, but necessary medicine, particularly during the global financial crisis that started in 1997. And the IMF hasn't been alone in urging the Fed to raise rates in recent years. Many Wall Street economists also believed that tight labor markets would eventually push up wages and prices and force the Fed's hand. At times it has seemed as if Mr. Greenspan was in the minority in his belief that technology had made workers so productive that companies could raise wages without jacking up prices.
In fact, the IMF has hit its share of bull's-eyes. Like when Mr. Camdessus pushed the U.S. Treasury -- as he began doing even when it made the Clinton administration uncomfortable -- to get rid of the federal budget deficit. And the Heritage Foundation, a conservative think tank, just completed a study showing that the IMF's economic forecasts for the U.S. have largely been on target.
"The advice with respect to the U.S. has been remarkably close to what the policy has been," says Michael Mussa, the IMF's chief economist.
Opposite Tracks
Perhaps. But at key junctures over the past few years, the IMF has urged the Fed to move in one direction, and Mr. Greenspan, following his instincts, has headed in the other.
Take July 1997, just weeks after the Thai baht collapsed and sparked what was to balloon into a full-fledged global financial crisis. On July 28, the IMF board of directors, including representatives of Russia, China and Japan, gathered at their Washington headquarters to discuss the U.S. economic outlook. Many of the directors advocated "a further, moderate and pre-emptive tightening" of credit policy to forestall inflation, according to an official summary of the meeting.
The Fed, which had already raised rates by one-quarter percentage point in March, rejected their counsel and kept the federal-funds rate steady at 5.50% for more than a year and a half.
The issue arose again in the first half of 1998, as the financial crisis spread, threatening Russia. That May, Mr. Camdessus told an audience in Australia that America would "have to move soon, rather than later -- the question is to know when." Again, the Fed paid no mind.
On Aug. 3, 1998, two weeks before Russia devalued the ruble and defaulted on its domestic debt, sending financial markets into panic, the bulk of the IMF board "noted that a tightening of monetary policies could well be needed" in the U.S.
Fed policy makers again held their fire when they met on Aug. 18, a decision that in retrospect looks almost Solomonic. After the Russian implosion and the near-collapse of U.S. hedge fund Long-Term Capital Management, credit markets in the U.S. and abroad seized up, and officials feared that all but the most secure corporate borrowers would be cut off from financing. The IMF quickly recognized the danger and changed course, urging rapid interest-rate cuts in the U.S. and Europe. This time, the Fed went along, and lowered rates three times in quick succession.
Just last week, Mr. Mussa issued the IMF's latest advice: "Interest rates probably will need to become a little bit firmer next year."
He will find out whether the Fed agrees with this assessment on Tuesday, when the central bank's policy committee meets to discuss interest rates.
But, if U.S. policy makers disregard the IMF's advice so often, why does the IMF continue to offer it? The answer is that the organization doesn't want to appear to give special treatment to any one of its 182 member countries. If Ecuador has to sit through IMF lectures, then the U.S. has to as well, the thinking goes.
Of course, small, poor countries that borrow money from the IMF don't have the luxury of throwing its advice into the Dumpster. They have to follow IMF advice or, like a tycoon dealing with a ne'er-dowell heir, it will cut them off. And the U.S. Treasury, even though it ignores the IMF's counsel itself, is usually first to insist that developing countries toe the IMF line.
Wrongheaded Orthodoxy?
The IMF's missed calls haven't escaped the notice of its growing phalanx of critics in Congress. The IMF leans toward wrongheaded economic orthodoxy, Rep. Barney Frank told then Deputy Treasury Secretary Lawrence Summers, when he cornered Mr. Summers on the issue at a congressional hearing a few months back. And there's no better example, the acerbic Massachusetts Democrat added, than the advice the IMF has given the U.S.
"I'm glad the last two times the IMF told America to raise interest rates, the Federal Reserve didn't pay attention," Mr. Frank said. "You get a reputation for being responsible in the financial world by the ease with which you bear the pain of others." That pretty much sums up the IMF, he concluded.
Mr. Summers, who now is Treasury secretary, did some verbal shuffling, then admitted: "I don't think that advice would necessarily be judged to have been the best advice."