New York – With seven months left in his term, Federal Reserve Chairman Alan Greenspan is trying to win back business confidence, manage interest-rate policy and keep a cork on inflation, all with an eye toward the legacy he’ll leave his successor.
It’s a tricky balancing act, but Wall Street seems confident the avuncular Fed chief of 18 years can pull it off – and perhaps goose growth in the second half while he’s doing it.
It goes without saying that Greenspan will want to make the most of his speaking opportunities during his final months.
He has proved himself a remarkable steadying influence on the market; a case in point was the performance of stocks Thursday.
Wall Street got off to a slow start but ended on a positive note after Greenspan delivered a bullish assessment of the economy to Congress. The fact that he’ll stay in office through the end of the year has many analysts feeling upbeat about the rest of 2005.
“This will be a good year in the market. It may not be a great year, but it’ll be a good year,” said Michael Murphy, managing partner at the Piney Run Group in Baltimore. “Greenspan isn’t going to let this fall apart. There’s just so much respect for him, no one questions him. He’s the guy who moves the market. My concern is going to be for next year, when they try to replace him. You know how the market hates uncertainty.”
Investors have been preoccupied with interest rates lately, trying to gauge how much higher they’ll go. The Fed has raised rates eight times over the past 12 months, and Greenspan hinted to lawmakers that the gradual tightening was likely to continue. The Fed’s Open Market Committee is widely expected to raise the federal funds rate by another quarter-point to 3.25 percent at its next meeting, set for June 29-30.
Most market seers say one of Greenspan’s goals is to deliver a neutral monetary policy to whoever replaces him when his term ends Jan. 31. That probably means a bit more tightening after the June meeting, not less, said Jack Caffrey, equities strategist at J.P. Morgan Private Bank in New York. It’s just one of many factors Greenspan will weigh as he navigates this period.
“You don’t want to let inflation get out of the bag … hence, making sure we keep a measured pace of reduction in the accommodative monetary policy. Alternatively, you don’t want to overtighten and get blamed for the next recession,” Caffrey said. “As much as you think after 18 years that you know what you’re doing, in some sense, from a legacy perspective, the stakes are a bit higher now.
“There will be no more chance for a comeback after February of 2006.”
Before a new chairman is chosen, Greenspan must tackle an intimidating to-do list, said Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland.
Among other things, he probably would like to engineer a reacceleration in growth that doesn’t rely so much on consumer spending and borrowing from overseas.
That means rekindling domestic business investment, which could go a long way toward boosting overall growth in productivity, Morici said.
Greenspan is also looking to get short-term interest rates up to a level that will make monetary policy a useful tool for his successor; rates need to be high enough that lowering them will be a viable option when recession next threatens.
It also would be nice to leave his successor with an environment where the United States isn’t overly dependent on foreign debt to fuel consumer spending and power growth.
“It’s a matter of restoring balance in the economy, getting the dollar where it belongs, getting interest rates where they belong, relying less on consumer spending and restoring business confidence so businesses are willing to invest and productivity can grow,” Morici said. “Not all of this is within his power.
“Treasury is responsible for currency. But it would be optimal, after such a long and successful tenure, to not bequeath his successor with significant imbalances in the economy that constrain their ability to further manage the recovery.”
That means getting the components of spending right: relying less on consumer spending, avoiding a housing collapse, and inspiring enough confidence in big business that corporations will invest in physical assets again.
It’s a big job, and when Greenspan is finished, there’s bound to be some trepidation on Wall Street over who will step into his shoes.
But it would be a mistake to think he’s the only one who can do it, Morici said.
Next in line?
Names frequently mentioned as possible successors to Fed Chairman Alan Greenspan, below:
Martin Feldstein: Economics professor at Harvard University, president of the National Bureau of Economic Research and a campaign adviser to President Bush. Feldstein, 65, applauds Bush’s tax cuts and the Social Security overhaul.
R. Glenn Hubbard: Dean of Columbia University’s graduate school of business, economics professor and Bush’s chief economic adviser from 2001 to 2003. Hubbard, 46, helped shape the end of the stock-dividend tax and promoted Bush’s Social Security plan.
Ben Bernanke: A Fed board member since August 2002, Bernanke, 51, was nominated chairman of the Council of Economic Advisers in April.
Donald Kohn: 62, Fed board member
Roger Ferguson: 53, Fed vice chairman
John Taylor: 58, Stanford University economics professor
THE ASSOCIATED PRESS
