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Greenspan the activist gets bolder
For all his verbal caution, the Fed chief slashes interest rates at unprecedented pace.
One Wall Street analyst now calls Alan Greenspan a "crazy guy." He means it as praise.
In the twilight of his career, Mr. Greenspan has turned the Federal Reserve - traditionally the most conservative of US institutions - into one of the most aggressive manipulators of interest rates in US history.
Indeed, he and his button-down colleagues at the Federal Reserve are pursuing a monetary course that, by historic US and contemporary world standards, is almost radical in trying to revive a slumping economy.
While the two other key central banks in the global economy - the Bank of Japan and the European Central Bank - have been moving cautiously, the Fed this year has lowered rates proportionately more than at any time since World War II. Another cut in short-term interest rates, expected yesterday, would mark the tenth drop by Greenspan & Co. since early January, bringing rates to a 40-year low.
"This is quite extraordinary," says Allen Sinai, chief economist for Decision Economics, a Waltham, Mass., consulting firm.
The reason for the dramatic action is both personal and economic. Greenspan would clearly prefer not to end his tenure in the middle of a recession, and the US economy has shown reluctance - even balkiness - in responding to the the board's moves so far.
That was painfully evident again Friday, when the government reported that unemployment in October jumped from 4.9 percent to 5.4 percent. Because of the sudden spurt, most Fed watchers were expecting Greenspan and his crew to reduce the so-called federal funds rate by half a percentage point yesterday, to 2 percent. (The Fed's announcement came after the Monitor's deadline. The alternative would be a quarter-percentage point drop.)
At 2 percent, the Fed funds rate will have been slashed 60 percent in 10 months, from 6.5 percent at the start of the year. When Fed chairman Paul Volcker used aggressive monetary tactics to fight inflation in the 1970s, the Fed funds rate moved down more points. But, proportionately, it was less than what Greenspan has done.
"We would probably be in a much worse economic funk without [this year's rate cuts]," says Peter Kretzmer, an economist with BankAmerica Corp. in New York.
Commercial banks, which charge one another the Fed funds rate on overnight loans, haven't seen such rates since September 1961. But economists remain uncertain as to how fast the moves will turn the economy around, or how much.
Up to this point, businesses, and more recently consumers, have been reluctant to spend money despite the lower costs of borrowing. Both are saving more than spending - a sign of a lack of confidence. The tentativeness has been heightened, dramatically, by the events of Sept. 11.
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