Greenspan steps down as Fed chief with his reputation at its zenith

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The Independent Online

After a reign of more than 18 years, Alan Greenspan stepped down as chairman of the Federal Reserve yesterday, pushing through a valedictory 25-basis-point increase in its key short-term interest rate, and hinting that yet further increases could be on the way.

Almost simultaneously, the US Senate formally approved Ben Bernanke, a former colleague of Mr Greenspan on the Fed's governing board and from May 2005 President Bush's chief economic adviser, as the 14th man to lead the central bank since its establishment in 1913.

Yesterday's decision, widely expected by markets, was the 14th consecutive such increase of the current tightening cycle which began in June 2004 - when the benchmark federal funds rate stood at 1 per cent, its lowest level since the Eisenhower era. The cost of fed funds is now 4.5 per cent.

His reputation still at its zenith, the 79-year-old Mr Greenspan enters a "retirement" that is likely to see him write a book, set up a financial consultancy here, and join the lucrative speaking circuit, commanding fees of up to $150,000 per appearance. For Mr Bernanke, however, the task will be more arduous, as he takes the Fed's helm at a particularly delicate moment.

The immediate question is whether the latest increase in rates is the last of the series - and in its minutely scrutinised statement, the policymaking Federal Open Market Committee predictably gave no clear answer to that question.

Although "recent data is uneven", the statement noted, underlying expansion appeared solid, while longer-term inflationary expectations remained "contained". But in the next breath it warned that potential for inflation still existed, and that "some further tightening may be needed". Bill Gross, head of the Pimco investment group, said: "Basically, they've given Bernanke a relatively clean slate." The statement indicates that the central bank will shape its policy as events dictate.

Here, however, uncertainty prevails. Opinions are divided on the future course of the economy. One school believes that the feeble 1.1 per cent growth announced last week for fourth-quarter 2005 GDP is proof that the economy is slowing, and that further rate rises could inflict serious damage.

But others dismiss the figure as a blip, and point to the stirrings of inflation, measured at 2.2 per cent in the latest GDP figures. They warn, moreover, that Mr Bernanke will be keen to send an early signal to markets that he will keep a tight grip on inflation - as to be expected from a man who, like the Bank of England and the European Central Bank, is a firm believer in inflation targeting, whereby the Fed makes public the inflation rate at which it is aiming its monetary policy. For that reason, the FOMC may well push up the fed funds rate to 4.75 per cent when it next meets on 28 March, and thereafter may go to 5 per cent or even beyond.

Ultimately, Mr Bernanke's hand could be forced by elements largely beyond his control, most notably the country's huge federal budget and current account deficits - this latter now running at more than $700bn (£400bn) at an annual rate, equivalent to more than 6 per cent of GDP.

These have been mainly financed thus far by massive investment inflows from China, Japan and other surplus countries, enabling the Fed to keep interest rates relatively low. The inflows also explain in part what Mr Greenspan calls the "conundrum" whereby long-term rates have held steady or fallen even as short-term rates have risen.

As a result, mortgage rates have stayed low, fuelling a house price boom that has enabled homeowners to unlock equity, and thus underpinned consumer spending. But that spending is now showing some signs of slowing - unlike the internal and external deficits.

This is the shadow that overhangs Mr Greenspan's legacy. His fiercest critics concede he has been a masterful handler of financial crises, from the Wall Street "Black Monday" crash three months after he took over in July 1987, to the Asian and Russian financial collapses a decade later. He is also credited with steering the economy adroitly through the mini-recession of 2000-2001, and the trauma of 9/11.

But he has also passed on to his successor a country burdened with debt and deficits without parallel. He is accused of being too soft on what he once termed "irrational exuberance" - first in the stock market boom that crested in 2000, and now with the housing "bubble". He is also blamed for backing the massive tax cuts, early in Mr Bush's first term, that have contributed mightily to the current deficit. Like Mr Greenspan, Mr Bernanke is a Republican. He will be under strong pressure from markets to demonstrate that he is fully independent of the White House, where until recently he was employed.

The music stops for veteran chairman

Alan Greenspan will leave the US Federal Reserve with a reputation to die for - and his personal chair as a memento.

It is a long-standing tradition that members of the Fed's Board of Governors can take their chair - the top of which has a brass plaque that carries their name - when they step down.

The image of a 79-year-old economist hulking his own furniture out of his office as he closes the door behind him might not seem to many the appropriate image for the world's most famous central banker.

But observers say that is entirely in keeping with the way he has conducted himself over the past 18 years, five months and 20 days. One official said: "He came quietly into the Fed, he kept a low profile within the Fed and he will leave with the same profile."

This is echoed by his rejection of all of the requests by journalists for a valedictory interview. A spokesman for the bank said there would be some internal events to "honour the chairman" but said that releasing details of his schedule would be a "security risk".

One can imagine that, like any long-standing departing chief executive, there would be the usual speechifying by his fellow members of the Federal Open Markets Committee.

Mr Greenspan lowered himself into his chairman's chair in the boardroom at 9am US time (2pm in London) yesterday. Around a 27-foot-long mahogany table were gathered the other six members of the board, the head of the New York Fed - who has a permanent voting seat - and the presidents of the other 11 regional Feds, of whom four have a vote on a rotating basis.

As they have done for decades, they will review economic and financial conditions, determine the appropriate stance of monetary policy, and assess the risks to its long-run goals of price stability and sustainable economic growth.

As today dawns on Mr Greenspan as a private citizen, retirement is the furthest thing from his mind. He is expected to open a consulting firm specialising in economic analysis. He also plans to write a book and give lectures but will steer clear of invitations to join corporate boards.

Perhaps he will be tempted to return to the jazz saxophone. He played in a swing band for two years in the 1950s but gave it up in pursuit of a career in economics.

Philip Thornton

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