The chairman of the Federal Reserve Board testifies before Congress twice a year on the state of the economy. Many consider his comments this week to be the most important economic pronouncements of the year. Traders and investors hang on his every word. The problem is, even the experts often can't make heads or tails out of what the Fed chief says. As governor of the Federal Reserve Board from 1996 to 2002, Laurence Meyer helped shape economic polices. Now he's written a book -- A Term at the Fed, an Insiders View -- that peels back the veil of the world's most powerful financial institution. He joins us from the nation's capitol.

Meyer recently spoke with Wall $treet Week with FORTUNE's Karen Gibbs. Excerpts of their conversation will appear on our Feb. 18, 2005 broadcast, but meanwhile, here are portions that won't be airing:

KAREN GIBBS: Well, Greenspan's statements obviously are very well-crafted. Can you tell us what goes on behind closed doors to arrive at that language?

LAURENCE MEYER: If a board member felt very strongly that some particular element was undervalued, the Chairman would go out of his way to try to accommodate that, and there would be a very rich discussion about the outlook in monetary policy prospects triggered by the Chairman's testimony.

GIBBS: Any name calling? Any screaming and pounding on the table or…

MEYER: There's never name calling. You know, the Fed, it tends to be a very formal place, first of all, but the Chairman is very respectful for everybody on the board, never criticizes, never argues with people, is very open to hearing what everybody has to say. So it's a thoughtful, but sometimes it can get, sometimes intense because people feel strongly about their views, but always in a friendly way.

GIBBS: The Fed has missed the growth targets before. What happens if this bright picture dims a bit?

MEYER: Well, of course the point about monetary policy is that it's very easy to quickly adapt monetary policy to the incoming data. At any point in time, the committee is thinking about an approach to monetary policy that's conditioned by the incoming data and the forecast at the moment. But as the data changes, as the forecast evolves, the committee can quickly change the course of monetary policy that's appropriate.

GIBBS: Now the Fed's challenge is to control inflation, to maintain price stability. But the Fed has also, the Chairman has also said that inflation is a function of the price of oil and the strength of the dollar, neither of which we really have control over. So how can we try and contain inflation under that scenario?

MEYER: Well, typically oil prices when they rise lead to a burst of inflation, but what the inflation that the Fed worries about is really what's going to be over the sort of the intermediate term and it watches what we call a core measure that excludes oil prices. And only if the rise in oil prices feeds through to broader measures of inflation is it a concern to the Fed. That hasn't been the case with the recent rise in oil prices. And so far the decline in the dollar, while it's been considerable, hasn't had that much impact on import prices and to date hasn't been much of a factor in raising inflation.

GIBBS: But having said all that, it does appear that the Fed is on track to continue to gradually hike interest rates over the long term. Now housing activity is at the highest level in 20 years, partially powered by these low mortgage rates. Will higher interest rates affect housing? Is housing in a bubble and will higher interest rates pierce that bubble?

MEYER: I wouldn't say housing is in a bubble. Housing is responding in the way that you would expect to a continuation of very low interest rates, including especially low long-term interest rates. Now if the economy continues to expand at a solid rate as the Fed expects and if the Fed continues to raise rates and long-term rates rise some, then housing will be one of the first sectors adversely affected. But it's doing incredibly well now. It's not going to fall off the table, but it ought to slow as interest rates begin to rise further.

GIBBS: We're having a lot of foreigners that hold our government securities bailing out because of unattractive long-term rates. What can we do to fix that problem?

MEYER: Well, I wouldn't say they're bailing out at this point. I think one of the things that we've seen is that despite the low rates in the U.S., there's been a considerable willingness to continue to absorb dollar assets, and it reflects the fact that the U.S. is a very dynamic economy still. If we're growing at three and three quarters to 4 percent, we look around the world, we look at Europe can't even grow at 2 percent. We look at Japan; they've declined in the last three quarters. So when you look around the world and investors think where do they want to invest, the U.S. still looks pretty darn good.

GIBBS: All right, let's look at another statement the Fed Chairman said this weekend in talking about Social Security. Now Greenspan did not prescribe any fixes. Again, is this by design?

MEYER: Well, first of all, the Chairman has been very outspoken about Social Security reform. He's been very outspoken about the need to return the system to long-run solvency, and that means taking steps like potentially cutting benefits. This was a different story that you're talking about, and that's personal accounts. Personal accounts really don't have anything to do with returning long-term solvency. It's another sort of separate issue. And what the Chairman was indicating is if you want to go to personal accounts and you think you're going to finance that by borrowing more, there's some uncertainty about how that's going to affect the financial markets. Probably wouldn't have too much impact, but markets will have to make that judgment. And he says because there's some uncertainty, it's probably a good idea to proceed slowly, move in that direction very gradually so we can assess what the impacts might be.

GIBBS: But does Alan Greenspan support the President's proposal or does he not?

MEYER: He does. Well, he supports the President's proposal of moving in the direction of private accounts. And remember the President's proposal is to do so only partially and to phase it in. So I would say the Chairman is being rather supportive of the direction that the President is headed in with respect to private accounts.

GIBBS: How about the challenges that are facing the Federal Reserve Board right now? Do you see any repetition of the events that we saw in the 1990s, a pick up in merger and acquisition activity, technological breakthroughs that could fuel productivity?

MEYER: Well, I don't think we will for some time see the extraordinary kind of speculative activity and equity bubble that we saw in the 1990s or the frenzy about sort of innovation. We are seeing some pick up in risk-taking activity, some increasing merger activity, but that's perhaps to be expected as business caution begins to recede and risk-taking appetites begin to increase. But I don't see anything like what we saw in the second half of the '90s.

GIBBS: You mentioned the bubble and the irrational exuberance that the Fed chairman talked about in 1996, and the Fed really does try and make some forward-looking projections on the markets. But they've been blindsided before. The Fed didn't see the Asian financial crisis; it missed the market bubble and the 2001 recession. Those are some pretty big misses. What about if the assessment of the economy is wrong this time?

MEYER: Look, I'm a forecaster, and believe me; I don't get it right all the time. Neither does the Fed. We do the best we can. The Fed has an outstanding, I think a very good record of forecasting on average, and the markets indeed give a lot of credibility to the Fed's view of the outlook and to the Fed's forecast. But the point is all of us as forecasters and policy makers have to understand the limits of their ability to forecast the economy and the importance of responding to the incoming data altering that forecast as the situation changes and adjusting that policy so it's as appropriate as can be.

GIBBS: Will there be any sectors that benefit from this so-called soft landing?

MEYER: Well, I think most sectors will benefit. Investment is likely to be very strong. We're likely to see some improvement in the exports as the effect of previous declines in the dollar now have some impact of improving our trade balance. We're likely to see still a resilient household sector. As we pointed out, we talked about just before; the housing sector is likely to be one that will see somewhat diminished activity as interest rates rise further.

GIBBS: Dr. Meyer, thank you very much for joining us.

MEYER: Oh, it's my pleasure.

GIBBS: Could the Board of Governors talk among each other without having the formal meetings?

MEYER: Well, there's a rule that limits the number of governors that can be talking to each other to three without it being announced in advance. Its truth, sunshine law is what I think it's called. So that's fairly limited. Unless there's an announced meeting, no more than three governors can talk at the same time. The fact of the matter is that there isn't a great deal of conversation between the governors in between meetings about the outlook in monetary policy, and most of the discussion that goes on goes on at meetings of the board or at the FOMC meeting itself.

GIBBS: Alan Greenspan has been held up to be part of the dream team when he was with Clinton and Treasury Secretary Robert Rubin at the time. A lot of people, though, think that he's bungled the job. If you were to look at Alan Greenspan and look for a fault, what would that one fault be?

MEYER: Well, I don't want to identify a fault. I would say the Chairman has shown great leadership and very good judgment in the conduct of monetary policy over his tenure, and I think he deserves the respect he gets from those in the markets and those who follow monetary policy, that is for most of the people who do so. This is not an easy job, as I indicated. It is not easy to forecast the economy a year or two in advance. It is not easy to set monetary policy. I think the Chairman and the committee have done a very able job. I certainly would be the last one, having served on the committee for 5 ½ years, to criticize how I and the committee made decisions during that period. In terms of the discussions at the FOMC meeting, I'd love to see a little bit more spontaneity, a little bit more interaction. The meetings tend to be presentations that were prepared in advance, read at the meeting with very little interaction among the committee members.

GIBBS: Is that a good thing or a bad thing?

MEYER: Well, I think it's not certainly entirely a good thing. People say it results when the committee learned that the meetings were being transcribed and would be released after five years, and nobody wanted to appear at all incoherent during the meeting, so they prepared their statements beforehand and read them. Whatever the reason is, I think it takes away some of the effectiveness of the meeting which would come from a more interactive exchange among the members.