HOW is Alan Greenspan doing as head of the Federal Reserve?
"I would be complimentary on several scores," says David Munro, United States economist for High Frequency Economics, a New York consulting firm that provides daily economic research to some 200 institutions in 22 nations. Mr. Munro particularly approves of the Fed's efforts to keep monetary policy on "an even keel."
Since Mr. Greenspan became chairman in June 1987, Munro says, the central bank has avoided in some degree the economic booms and busts that troubled the 1960s, 1970s, and the first half of the 1980s. Though there was a recession in 1990-91, unemployment peaked at 7.7 percent, well below the 11 percent of the previous slump in 1981-82. The Fed has "minimized" the risk of its monetary policy being a source of economic instability.
The Fed, he says, "has managed to run a smoother economy."
Leif Olsen, a New Canaan, Conn., money manager and former chief economist for Citibank, is more critical. The Fed's policy moves, he says, were "not timely enough" to prevent either the last recession or the lackluster recovery since then.
Both economists, however, hold that the Fed's current monetary policy is about right. Nor do they figure the policymaking Federal Open Market Committee shifted its monetary stance when it met earlier this week. FOMC policy decisions aren't usually announced for a month.
"The Fed is expansionary enough," Mr. Olsen says. But he does find "a little troubling" the fact that the economy has not yet exhibited a strong, self-sustaining recovery in the areas of income, employment, and demand for goods and services.
Munro notes that the economy is growing today, not stalling as it was in 1990. Nor is higher inflation a threat requiring Fed action. He notes that consumer price inflation is running at a 2.8-percent rate this year, just under the 2.9 percent inflation of 1992. The inflation "hawks" among Fed policymakers have "piped down" on the need for higher interest rates. Munro forecasts a 2.8-percent real growth rate by year end.
During his last testimony to Congress in July, Greenspan was overly optimistic in his forecast of national output numbers. "He is having as much difficulty as any forecaster, and he is a pretty good one," Munro says.
Olsen has looked in more detail at Greenspan's forecasts in his midyear reports to Congress from 1989 to 1993 and concludes: "There is no evidence that his forecasting abilities differ much from when he was a private economist, nor are they much better than the average of most business economists."
In 1989, Greenspan was concerned about recession and the Fed had started to reduce short-term interest rates. A year later, in the month the recession began, he was less concerned and in no hurry to ease policy further. In 1991, a few months after the recession had ended, he spoke of a solid recovery, lower inflation, and "marked progress on the deficit." In 1992, he gave only a faintly upbeat forecast, speaking of economic growth as "dull."
"Greenspan and the others who set policy at the Fed, do not seem to be sufficiently sensitive to the lagged responses to past policy to act in a timely fashion," Olsen says. "We know that the Fed has reduced interest rates only after a significant number has been released, suggesting that the economy is much weaker than expected. Then and only then does the Fed act."
This tendency to conduct policy on the basis of contemporary data means that if the economy falters because of the tax bill, the Fed will become more expansionary. "The Fed will not watch the economy being strangled," Olsen says.
He has no doubts that the Fed could get the economy moving faster, if the fear of future inflation weren't a factor. Making his point with an improbable method, he notes. "If the Fed flew a helicopter over the high domestic population areas and dumped money out the door, it would soon get the economy growing." More likely the Fed would expand the money supply in its traditional way by buying government bonds on the open market.
The two economists, of course, know that Greenspan has only one of 12 votes on the policymaking FOMC. Nonetheless, the chairman has somewhat more influence than his colleagues.