Greenspan, his limo rides, and the future of interest rates

He's history's most famous jazz musician turned central banker. He's the most powerful financial figure in the world. And last week, President Bush nominated him for a fifth term as chairman of the Federal Reserve.

There are many ways to describe Alan Greenspan. But is he also a "social butterfly," as one economist puts it?

About once a week, the nation's top monetary official leaves the neoclassical Fed building on Constitution Avenue in Washington, and takes a limousine ride over to 1600 Pennsylvania Avenue.

On occasion, he meets with President Bush (once in 2003), but more often it's a tête-à-tête with members of his inner circle. Last year, he met with Vice President Dick Cheney seven times, with National Security Adviser Condoleezza Rice six times, and with Chief of Staff Andrew Card three times. In July 2003 alone, he met with six members of the cabinet, including Secretary of State Colin Powell.

More telling: The Republican central banker's visits to the White House have nearly quadrupled since Bush replaced President Clinton.

Those statistics make Mr. Greenspan a "social butterfly" in the White House, says Kenneth Thomas, a finance professor at the University of Pennsylvania's Wharton School, who generated the numbers.

Greenspan's private meetings at the White House are usually not disclosed at the time they take place. Nor is any record made public of what was discussed. Mr. Thomas used Freedom of Information Act requests to the Fed for Greenspan's personal calendar.

His visits lead to two intriguing questions: How involved is the Fed chairman in setting White House policy? And do those friendships with the highest level officials of the Bush administration alter what Greenspan does with interest rates?

Wall Street analysts already expect the Fed to raise interest rates this summer, perhaps as early as the next meeting of Fed policymakers on June 29 and 30, as a weapon against any revival of inflation. Money markets already assume an increase of one quarter of a percentage point in short-term rates from the present 40-plus-year low of 1 percent in June, and more later.

To political strategists at the White House, such a move might seem unfriendly. But a rate hike is unlikely to restrain the current vigorous economic recovery before the November election. Economists calculate that monetary restraint takes at least nine months, and more likely a year to 18 months, to brake the level of economic activity.

Monetary policy, though, often has a more immediate effect on financial markets. The assumption that the Fed will raise interest rates has hit both the stock and the bond markets in recent weeks.

In monetary policy, such a tiny interest rate hike is in reality "a very big one," holds Thomas.

Once the Fed starts raising rates, it becomes very hard to turn them back again should the economy deteriorate. That's because markets may see it as monetary mismanagement.

Greenspan will lead Fed policymakers to be careful and deliberate in changing monetary policy, partially because of his friends in the White House, Thomas says. "Greenspan & Co. will talk rates up, with the help of a willing media, but not move them very much or very quickly."

Greenspan's influence in the White House is addressed in Ron Suskind's new book, "The Price of Loyalty," Based on interviews with fired Treasury Secretary Paul O'Neill and others, the book indicates that Greenspan often conspired with Mr. O'Neill, an old friend, to shape Bush administration policies.

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