December 2, 1999
BY ROBERT NOVAK SUN-TIMES COLUMNIST
>From the mysterious inner recesses of the Federal Reserve Board comes
credible word that Alan Greenspan has changed sides. Does President
Clinton's failure to clearly signal a fourth term for the Fed chairman mean
Greenspan will apply the brakes to the economy?
Nobody is suggesting that Greenspan would let personal pique guide his much-applauded direction of monetary policy. Nevertheless, friends of the chairman (including some former colleagues on the Fed) see the president's silence on Greenspan's future as inescapably influencing this outcome: The chairman will move for more tightening next year at the increasingly divided central bank.
In the euphoria of 1999, nobody worries as much about the long-range impact of tighter money. Indeed, there was hardly a political peep when the Fed implausibly raised interest rates again Nov. 16 in the absence of inflation and the presence of excellent productivity figures. But the long-range impact of continued obsession with inflation could retard the economy well into the future.
The Fed is intentionally the least democratic entity in the world's greatest democracy. Accordingly, what is afoot on Constitution Avenue has to be doped out by examining scattered pieces of evidence, which are themselves shrouded.
Clue No. 1: Shortly before the Nov. 16 tightening, a Fed governor known as a relentless anti-inflation hawk put out this word: Nobody should think that we shall be precluded from additional interest rate increases in 2000 simply because it is an election year. In other words, there is more tightening ahead.
Clue No. 2: After the Fed's Nov. 16 tightening, an insider at the central bank let it be known that Greenspan was no longer among the "pragmatists" who resist a pre-emptive war against inflation; he has now joined the "ideologues." That would connote more interest hikes ahead.
Clue No. 3: According to impeccable sources, former Treasury Secretary Robert Rubin's arrangement with Citigroup does not include line responsibility or a future path to become the financial giant's CEO. That leaves the door open for Rubin to succeed Greenspan as Fed chairman.
Greenspan, at age 73, is not ready for retirement, and Clinton has had nothing but praise for the celebrated central banker. Furthermore, Treasury Secretary Lawrence Summers privately has assured the financial community that Greenspan definitely will be reappointed.
But the absence of an announcement may betray the desires of Vice President Al Gore, a very partisan Democrat, to name his own Fed chairman as president. Even if he is not reappointed, Greenspan (whose term as a Fed governor continues until 2006) would stay as chairman after his third four-year term ends in June 2000. A President Gore in 2001 could pick liberal Democrat Rubin to replace conservative Republican Greenspan.
Pondering this political situation, Greenspan understandably would be less interested in fighting off the "ideologues" and supporting the growing economy desired by the president. The Clinton-appointed Fed governors--Laurence Meyer, Edward Gramlich and Roger Ferguson--are all deficit hawks. If the president's own appointments won't keep the good times rolling, why should Greenspan?
Furthermore, prospective Republican presidential nominee George W. Bush weeks ago announced his support for Greenspan's reappointment. Bush's principal economic adviser is former Fed Gov. Lawrence Lindsey, who has urged rate increases as a pre-emptive strike against inflation, and who is a strong supporter of Greenspan.
Connecting the dots, sophisticated Fed-watchers surmise that Greenspan is casting his lot with Bush. At meetings of the Federal Open Market Committee early next year, Greenspan is expected to win an internal struggle to support his position that what he now considers a tight labor market requires the economy to be slowed down.
There are reports of two dissenting votes against the rate increase in the Nov. 16 FOMC meeting--extraordinary in this consensus-driven organization. It is also reported that New York Federal Reserve President William McDonough now aligns himself with the "pragmatists." Nevertheless, the will of the chairman surely will prevail next year.
This scenario could be aborted, of course, by Clinton's simple declaration that he will name Greenspan to a fourth term. That may have been the intention all along of the wily central banker.