Kudos for Greenspan As Fed Does Nothing

Federal Reserve policymakers did nothing last Wednesday. Interest rates remained unchanged. And Alan Greenspan won more praise for his performance as Fed chairman.

"He is looking like a genius right now," says David Wyss, an economist at DRI/McGraw-Hill, a Lexington, Mass., consulting firm. Bond traders, Mr. Wyss himself, and many other Fed watchers had been clamoring this summer for a rise in interest rates, fearing that too robust an economy would revive inflation.

The quiet-spoken Mr. Greenspan predicted the economy would slow and inflation remain moderate. He was right.

The Fed's monetary policy - crucial to interest rates, inflation levels, and the health of the economy - is decided by a committee of the seven Fed governors (including the chairman) and the 12 presidents of regional Fed banks (five voting at any one time). But the chairman, sitting at the head of the table, generally has more influence on policy than his one vote would suggest.

Allan Meltzer, a longtime Fed critic who is writing a history of the central bank, ranks Greenspan as "the best" of any Fed chairman - far above others "in terms of handling problems that arise."

"He brings to the job top knowledge of, and expertise in the tracking and projecting of, the economy," says David Munro of High Frequency Economics, a consulting group in Valhalla, N.Y.

"One can nitpick around the edges," says Paul Kasriel, an economist at the Northern Trust Company, Chicago. "But overall, I would give him an A. He has added to the Fed's credibility."

All the kudos comes at a time when the economic expansion, the third longest in postwar history, has been "disappointingly slow," as Mr. Wyss and colleague Roger Brinner write. The expansion, which started 5-1/2 years ago, has been at "half speed" relative to two previous long expansions in the 1960s and 1980s. Real gross domestic product, the nation's output of goods and services, is up 14.6 percent above its level in the first quarter of 1991, the trough in this business cycle.

In contrast, real GDP rose 25.3 percent during the first 22 quarters of the 1980s recovery (from a deep recession) and 36.7 percent in the same timespan of the 1960s economic upturn.

But Wyss and Mr. Brinner hold that this sluggish growth is all the United States economy can tolerate, given slow growth in the labor force and in productivity. "If this economic expansion is to outlast the 1960s and 1980s expansions, it must continue to behave like the tortoise; in the long run, slow and steady wins the race," they maintain. "Sprinting ahead now requires a rest later."

Mr. Kasriel, however, says the Fed was slow to react to the banking "crisis" in the early 1990s, when banks squeezed lending because they needed to strengthen their balance sheets. "More aggressive easing" of Fed monetary policy might have meant a faster recovery from the 1990-91 recession, he says.

"Since that time, the economy has been growing close to its potential," Kasriel adds.

Wyss gives the lean and long Fed chairman only a C+ for the start of his term in office. Greenspan was sworn into office in August 1987. At that time, the Fed tightened monetary policy, perhaps prompting the stock market crash of October 1987. Then the Fed eased rates dramatically to prevent the market slump from spreading to the economy. The economy and market did pick up, but so did inflation. The Fed again tightened monetary policy and the economy slipped into a recession in late 1990.

"Since then, [Greenspan] has learned on the job," Wyss says.

Mr. Munro praises Greenspan's "deft political skills in dealing with people of all political stripes," including President Clinton.

Kasriel calls the Fed chairman "courageous and correct" for raising interest rates in 1994 to prevent a revival of inflation. His predecessor, Paul Volcker, won the war against inflation in the early 1980s with what Kasriel terms a "Draconian" monetary policy. "Alan Greenspan has kept the peace" - kept inflation around a modest 3 percent a year for the past five years, notes Kasriel.

Dr. Meltzer, an economist at Carnegie-Mellon University in Pittsburgh, urges Greenspan to follow a less "eclectic policy," looking at various economic indicators at different times. He calls for "systematic procedures" setting inflation targets, as do central banks in Britain and New Zealand, and spelling out a method for meeting those goals. Nonetheless, Greenspan has done "extremely well" in lowering inflation without a recession, he says.

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