|
|
 |
 |
 |
 |
   |
THE FED: NO SIGN OF THE DOVE, YETGreenspan isn't likely to rock the monetary policy boatAs soon as the Federal Reserve's annual policy gabfest in Jackson Hole, Wyo., broke up on Aug. 30, Alan Greenspan dashed off to one of his favorite summer vacation spots, a tennis camp in California. But you can bet the Fed chairman had his hands full between sets. With Russia in chaos, Asia's currency crisis threatening to take down Latin America, and Wall Street buffeted, Greenspan is the man on the spot. Increasingly, traders, business leaders, and politicians are looking to him to bring stability to a wobbly global economy. Their advice to Greenspan: a bold interest-rate cut by the U.S. central bank. It would aid emerging markets parched for liquidity and provide a psychological lift to investors who fear the global economy is in a deflationary spiral, they hope. National Association of Manufacturers President Jerry J. Jasinowski, for one, is imploring Greenspan to slash the federal funds rate, charged on overnight interbank loans, from 5.5% to 5%, to ''help prevent the spread of worldwide recession.'' Ford Motor Co. Chief Economist Martin B. Zimmerman agrees on the need for a rate cut, taking note of the ''risk that the financial market instability could erode consumer and business confidence.'' But Greenspan is likely to spurn such appeals, at least for now. The Fed chief has long been praying for a slowdown of the U.S. economy and an orderly correction to an overheated stock market. Now that he has gotten both wishes, Greenspan is not about to rock the monetary-policy boat--as long as conditions on Main Street and Wall Street don't deteriorate much more. EIGHTIES REDUX? Fed officials say that if more foreign currency crises erupt, sending U.S. markets down, say, an additional 10% or 20%--and creating a worldwide panic--Greenspan might be inclined to jump in with a rate cut to provide some psychological support to global markets. Indeed, some senior Fed officials say that if such a gloomy scenario came to pass, they might push for a coordinated rate reduction with central banks in Europe, where economic conditions also remain relatively strong. There is precedent: The U.S. has coordinated monetary policy with other governments in response to past global crises. Still, as nervous as they are about global events, Fed officials appear in no rush to act--in part because they aren't sure a rate cut by itself is a magical salve for the world's ailments. True, lower U.S. rates would briefly help the few countries that peg their currencies to the dollar, such as Hong Kong and Brazil. A small rate cut not coordinated with any actions by other countries, however, would do little to pull Asia's struggling economies out of recession--and accomplish nothing in Russia, whose problems stem from a lack of political will to adopt market reforms. ''How would a rate cut solve Boris Yeltsin's real problem--that he can't collect taxes?'' asks one Fed official. The economies of Korea, Thailand, and other Tigers will start to mend, Fed officials argue, only when they swallow the bitter medicine prescribed by the International Monetary Fund--namely closing insolvent banks, balancing their budgets, and ending the incestuous ties between business and government. That belief is shared by some Wall Street economists who say that without structural reforms in countries such as Indonesia or Russia, foreign investors are unlikely to return. They say the risk from a rate cut is that any extra liquidity created by the Fed might only flow back into the U.S. and other safe-haven markets, which are already awash in liquidity. ''Monetary policy is not the panacea for the rest of the world's problems,'' says John Lipsky, chief economist at Chase Manhattan Bank, who nonetheless believes the U.S. economy will slow enough on its own to warrant a rate cut. What's more, most of the Fed officials surveyed insist that a rate cut is out of the question if the U.S. economy remains strong. ''We'd be hard-pressed to do something that wasn't justified by domestic conditions,'' says one insider. ''Our mandate is not to be the central bank to the world.'' So far, the Fed sees few signs that the domestic economy is losing serious altitude. After a temporary lull in the second and third quarters in the wake of a massive eight-week strike at General Motors Corp., some Fed officials are bracing for a snap back in the fourth quarter. Some officials see the possibility of growth above 3%--double the estimated rate for second and third quarters--and maybe as high as 4%. One reason: GM is ramping up production as fast as it can to replenish inventories depleted by its strike. That alone could add as much as 1.5 percentage points of growth in the fourth quarter. Still, Fed officials acknowledge that the risks have shifted from an overheated, inflation-prone U.S. economy to one at risk of being destabilized by a stock market crash or dragged down by the deflationary forces sweeping Asia. That's why St. Louis Fed President William Poole, who favored a rate hike in May, voted with other Fed policymakers to stand pat on rates in July. CHAIN REACTION. And while just a few months ago some Fed officials would have welcomed a stock market correction, today they admit they're watching closely to make sure that the downturn doesn't crimp consumer spending --and set off a chain of events that triggers a recession. That would justify monetary easing that would keep the economy from dipping into recession. For Greenspan, the trick is to make sure the domestic economy stays strong enough to keep the world from drifting into a synchronized slump--and pulling the U.S. with it. If his interest-rate calls prove accurate, he may even find more time to work on his backhand.
By Dean Foust in Washington RELATED ITEMS
|
Updated Sept. 3, 1998 by bwwebmaster
Copyright 1998, by The McGraw-Hill Companies Inc. All rights reserved.
Terms of Use