Slowed economy is Greenspan's ace in hole

[Seth Ackerman]

Slowed economy is Greenspan's ace in hole 

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.