Greenspan- Fed must be flexible when dealing with economy

Saturday, August 30, 2003

JACKSON, Wyo. -- Alan Greenspan on Friday mounted a strong defense of his handling of monetary policy against criticism that the Federal Reserve Board has unnecessarily confused financial markets recently with its mixed signals on interest rates.

As he enters his 17th year as chairman of the Fed, Greenspan used an appearance before a prestigious monetary conference to defend his legacy against the recent attacks and an old, but persistent complaint that his biggest error was waiting too long to prick the stock market bubble of the late 1990s.

The participants at this year's conference, which included central bankers from around the world, held a spirited, if at times highly technical debate, on such subjects as the benefits of using inflation rate targeting to provide better guidance to markets. Under this system, a central bank would announce an annual target for inflation and then conduct monetary policy to achieve that desired level of price increases.

Greenspan has argued that setting a numerical target is too inflexible and simplistic when the U.S. central bank is faced with an enormous array of variables in trying to manage the U.S. economy.

He said that policy-makers must manage monetary policy in a world of uncertainty, ready at all times to deal with a variety of risks, including some that seem remote.

But he said that rules, such as establishing a target for inflation, are "by their nature simple" and a poor substitute for discretion on the part of policy-makers trying to manage a wide variety of risks in a complex economy.

Bond market's ride

Greenspan and his colleagues have been criticized for sending misleading signals to financial markets beginning this May with their comments on deflation, triggering a roller-coaster ride in the bond market. This sent long-term interest rates falling to the lowest levels in more than four decades, only to backtrack with a sharp rise in rates in recent weeks.

Greenspan did not specifically address the roller coaster ride the bond market has been on recently, but analysts viewed his overall comments as a further commitment to keep the federal funds rate, now at a 45-year low of 1 percent, at that level for many more months to try to moderate the surge in long-term interest rates.

One of the papers at this year's conference reopened the argument over whether the Fed erred when it did not move to raise interest rates more quickly in 1999 to keep a stock market bubble from expanding further.

Stock prices eventually peaked in the spring of 2000 and since that time trillions of dollars in paper wealth have been wiped out.

Greenspan said his views had not changed -- that small increases in interest rates would not have pricked the bubble and that massive rate increases would have caused a recession.

Respond to this story

Posting a comment requires free registration: