The Federal Reserve has taken a very pro-active stance in response to what we view as economic developments. We have other tools to work in terms of market liquidity, the term auction facility, for example ...

I would discourage you from thinking that simply because, or because of, significant action in the credit market like we had yesterday that suddenly we are going to have a meeting of the Open Market Committee ... and that suddenly we are going to move Fed Funds rates. It doesn't work that way.

As reported by Market News International

I would discourage you from thinking that simply because, or because of, significant action in credit markets like we had yesterday, that suddenly we are going to have an Open Market Committee meeting and that suddenly we are going to move Fed funds rates in response.

We reacted with very deliberate actions that took place ... in a very short period of timeframe, and I think that it shouldn't be the markets' expectation that we will continue to react in that manner.

As reported by Reuters.

Around the turn of the year, early in January, the data took a significant turn for the worse. And it seemed clear that the economy was slowing and slowing more than anticipated and that the credit market condition -- situation was continuing.

     On January 9th, I called a meeting of the Federal Open Market Committee by video conference to discuss the situation. It was agreed by the committee that some substantial additional cuts in the federal funds rate were likely to be necessary.

     The thought at the time of that meeting was that it might be worth waiting until the regular meeting at the end of the month where we could have a fuller discussion and see the revised forecast and so on, taking into account the possibility that we could also move inter-meeting if necessary.

     On January 10th, I gave a speech where I informed the public that I thought that substantive additional action might well be necessary, thereby signaling that the conditions had changed and that further rate cuts were likely to happen.

     In the days that followed that speech, the tone of the data deteriorated considerably further, which made me think that the outlook was, in fact, much weaker and the risks were greater.

     That was showing up both in the data and in the financial markets. We were seeing sharp declines in equity prices, we were seeing widening of spreads and we were also seeing, again, adverse data.

     On January 21st, I became concerned that the continued deterioration of financial markets was signaling a loss of confidence in the economy. And I felt the Fed really, instead of waiting until the meeting, we really needed to get ahead of that and needed to take action. So I called a FOMC conference call and we agreed at that point to cut the federal funds rate target by 75 basis points.

     There was an understanding at that meeting that further additional action was very likely to be needed, but we felt that we could wait another 10 days to the regular meeting to determine exactly how much additional action.

     At the meeting at the end of January, we had a full review, discussion, forecast round and so on, and determined that an additional 50 points was justified.

I'll just speak for myself. It wasn't - the bond insurers were not an important factor for me. The week before we just got a slew of adverse real news, and that was the predominant consideration in my mind for that intermeeting move.
 
In response to a question about the role that bond insurer problems played in the FOMC’s decision to ease on January 22.  Unofficial transcript.

"President Poole is speaking for himself and not for the committee."

As reported by the Wall Street Journal after President Poole's public objections to intermeeting rate cuts:  http://www.wrightson.com/federal_reserve/fedspeak/item/3135

    William Poole, president of the Federal Reserve Bank of St. Louis, said there's no sign that the subprime-mortgage rout is harming the broader U.S. economy, and an interest-rate cut isn't yet needed.   ``I don't see any impact as yet on the real economy or on the inflation rate,'' he said in an interview in the bank's boardroom. ``Obviously, there could be an impact, but we have to rely on some real evidence.''
     Barring a ``calamity,'' there is no need to consider an emergency rate cut, Poole said. His comments were the first by a Fed official since the U.S. central bank joined counterparts in
Europe and Asia to inject emergency funds after a surge in money-market rates. The Fed has added $71 billion of reserves in the past five trading days.
     Poole, 70, said businesses have maintained their hiring and investment plans and banks have sufficient capital to weather the credit-market turmoil. The St. Louis Fed chief stressed that the best course is for policy makers to assess the latest economic data when they next meet Sept. 18. The comments contrast with the certainty that traders put on a rate cut next month.   ``If the data confirm the market's view that the economy is sagging, we'll have to decide whether to share that view,'' said Poole, who votes on the rate-setting Federal Open MarketCommittee this year. He cited the monthly jobs, retail sales and industrial production reports as key gauges he'll be watching.

As reported by Bloomberg News

An increase in the intended rate of 25 basis points between scheduled meetings has a very different meaning than the same size increase at a scheduled meeting. To reduce uncertainty over the meaning of intermeeting policy actions, the FOMC could adopt an explicit policy of making all policy adjustments only at scheduled meetings unless there were a compelling circumstance to act between meetings. The compelling circumstance ordinarily could be easily explained; indeed, the event triggering a policy response would probably be highly visible and the policy response occasion no market surprise.

Another important step toward more predictable policy was for the FOMC to confine policy actions to regularly scheduled meetings.  Since February 1994, policy actions other than at a regularly scheduled FOMC meeting occurred only in unusual circumstances.

The fact that we have almost an entire month before our next scheduled meeting is very significant to me.  I think it would be a terrible mistake to wait another month.

I must say that I am opposed to intermeeting moves in general in the absence of some compelling new piece of information of the sort that we confronted in the fall of 1998 or some other totally unexpected shock.  In my view, intermeeting moves create the expectation going forward, for many months or quarters to come, that an intermeeting move might be considered.  That adds to the riskiness of the short-run trading environment in the markets, including the equity market.  The presumption is that with greater risk in the market, prices will tend to be lower and expected yields have to be higher to compensate for the greater risk.  So I'm concerned that an intermeeting move in the near future would simply create more problems for us going forward.  I don't think it matters for the longer-run course of the economy whether rates are moved down now or on May 15th.  But an intermeeting move does produce an environment of greater uncertainty about the way in which we will proceed in the period ahead.  So, I must say that I am very opposed to an intermeeting move in the absence of compelling new information.

I don't believe that our meeting schedule was set with any sort of divine intervention.  It's not as though we knew that the dates we chose last year would be ideal for making decisions about macroeconomic conditions of this year.  Therefore, while I would prefer not to move between meetings, I frankly don['t believe that we necessarily have to wait for a crisis either.  I think we should be willing to move, particularly if the period between meetings is uncomfortably long, as the data start to mount and as a consensus on the outlook starts to emerge.

I also think it is better to move at meetings.  I like to have a full forecast in front of me and to have detailed presentations by the staff on recent developments and the outlook.  If we're going to move between meetings, then I think we need to have an appropriate justification.  I think moving today at a time when the markets have been pricing out the probability of an intermeeting move would only lead to a great deal of confusion about what we are doing and how we are viewing the economy.

I am quite frankly opposed to giving a deliberate hint of an intermeeting move.  I think that's going to cause us difficulty not only in coming weeks, but well beyond because people will be wondering in the future if an intermeeting action is on our minds.  So, I believe that that would be a mistake.

CHAIRMAN GREENSPAN:  So I think the real choices here are 25 basis points plus asymmetry toward the down side or zero change now with downside asymmetry and the understanding that it is quite conceivable that we may have to have a telephone conference and move the rate before the next meeting. That's because we may find in this interval the answer concerning whether or not the decline in the rate of economic growth has stabilized.  What I conclude at the end of the day is that we need to recognize that we really do not know the answer for the intermediate period. I would encapsulate that into no change in the funds rate, but with a bias toward the down side and the recognition that, if the erosion continues, we very likely will have to move before the next meeting. And that move would be triggered, I would presume, by a telephone conference sometime in the early days of January--the first week or maybe the second week at the latest.

...

MR. GRAMLICH. Thank you, Mr. Chairman. As you know, the policy you suggested is not my first choice. Obviously, there is a lot of uncertainty out there, but I share the view of a few others around the table who think that we've seen enough to ease fairly soon. On the other hand, if we all agree to stand by our telephones, [Laughter] the policy you suggested "morphs" into what I would prefer, so I will support it on that basis. But I think we ought to be alert and stand by our telephones.

The issue of the Chairman's authority to make intermeeting policy moves is a tough one, Al, and I have some sympathy for your point of view. But it is related to a longstanding practice and this amendment to the Authorization does codify that practice. To my mind, in some ways it sets the boundaries more clearly. If some future chair abuses the authority, that is something the Committee will have to deal with. But the way the Authorization reads now gives me a sense of confidence that it would be used only in the most dire circumstances, and I think the Chairman has to have some flexibility to act in a crisis.