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.

Those attempts, however, were often unsuccessful. For instance, they sought to put triggers in tax-cut laws that would let cuts expire if the budget slipped into deficit. They sought tougher corporate-governance reforms. They talked about energy and trade policies and Social Security reform.

Greenspan's intervention "is fairly unique," says Tom Schlesinger, executive director of the Financial Markets Center in Philomont, Va. He figures Fed chairmen "have enough to worry about with [the usual Fed functions of] monetary policy, financial regulation, stewardship of the payments system, and being lender of last resort" in a financial crisis. But Greenspan hasn't "held back in dispensing his wisdom" in other areas.

That wisdom hangs on Greenspan's long involvement in federal economic policy. He was chairman of the Council of Economic Advisers under President Gerald Ford from 1974 to 1977, and was made Fed chairman by President Ronald Reagan in August 1987. During his Washington years, Greenspan became friends with Vice President Cheney, Defense Secretary Donald Rumsfeld, O'Neill, and other Bush administration officials.

Most economists regard the Fed, established in 1913 as an independent, nonpartisan body to conduct monetary policy, crucial to both economic prosperity and control of inflation. And many do not want to see that independence compromised, even if only in public perception, by a Fed chairman too deeply involved in nonmonetary policy.

"The more a Fed chairman works with an administration and gets involved in administration policy, the harder it is for him to keep the administration out of monetary policy," warns Allan Meltzer, author of "A History of the Federal Reserve" and an economist at Carnegie Mellon University in Pittsburgh.

Nor is such involvement unprecedented. Marriner Eccles, a member of President Franklin Roosevelt's "brain trust" during the Great Depression and appointed as Fed chairman in 1934, was much involved in Roosevelt administration policies. He advocated public works, unemployment insurance, and old-age pensions, even if their cost meant a bigger federal deficit.

William McChesney Martin Jr., who served as chairman from 1951 to 1970, joined meetings of what came to be known as the Quadriad - meetings initiated by President Eisenhower to coordinate policy among the Fed chairman, the chairman of the Council of Economic Advisers, the head of the budget office, and the Treasury secretary.

Of course, coordination has always been considered a legitimate function for the Fed chairman. But Arthur Burns, economic counselor to President Nixon before his appointment as Fed chairman, continued to fight for wage and price controls - to Nixon's deep annoyance.

Appointed to the post by President Carter, Paul Volcker worked with him on credit controls, an issue related to Fed functions.

Although Greenspan's involvement with the administration may be "more intense" than that of earlier Fed chairmen, Dr. Meltzer sees no sign that Greenspan "has not pursued the [monetary] policy he wanted to pursue."

Nor is Greenspan's involvement in matters unrelated to central banking likely to permanently expand the role of future Fed chairmen, says Mr. Schlesinger. His successors will probably have less Washington experience, and thus be more inclined to stick to the Fed's usual business.

Greenspan's reappointment, if approved as expected by the Senate, will keep him Fed chairman until January 2006 when his 14-year term as a member of the Fed's seven-member board of governors expires. On the day of his renomination, both President Bush and Sen. John Kerry, the expected Democratic candidate for president, paid him generous compliments.

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