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Commentary: Greenspan Unbound


Federal Reserve Chairman Alan Greenspan has certainly been in the news lately. In a three-week stretch that ran into early March, Greenspan took to the bully pulpit no fewer than eight times -- often speaking out on topics ranging far from his home turf of monetary policy. In the process, he has been accused of being a shill for the White House for his support of the President's tax cuts, an opponent of minority housing for his call to rein in mortgage giants Fannie Mae and Freddie Mac, and a foe of the elderly for advocating cuts in Social Security benefits.

But something important is being missed in all the sturm und drang over Greenspan's remarks. In the areas where his opinions count most, monetary policy and the economy, the chairman has also been speaking out -- and he has been unusually frank in setting out a road map for future interest-rate moves. He conceded that rates will have to rise at some point. Though that's obvious, it is unusual for a Fed chairman to openly predict the direction of interest rates. And in recent days, Greenspan has also laid down clear markers that show what would prompt the Fed to tighten credit.

That's new. Much to the exasperation of his central bank colleagues, Greenspan has always refused to be pinned down on three key questions that govern rate changes. What is the natural rate of unemployment -- the lowest level of joblessness that can be maintained without pushing up inflation? What is the trend rate of productivity growth? And how do you define price stability?

In testimony to Congress in recent weeks, Greenspan went a long way toward providing answers to all three. After years of wondering whether there even was a natural rate of unemployment, he now thinks the economy's increased flexibility and efficiency could allow joblessness to fall to as low as 4% without stoking inflation. That's controversial, at least in the economic fraternity. The consensus there -- and probably within the Fed -- is that the natural rate of unemployment is closer to 5%.

While Greenspan was among the first to spot the onset of the productivity revolution in the mid-'90s, he also shied away from spelling out what he thought the underlying growth rate of productivity was. But in responding to lawmakers' questions about whether the U.S. could grow its way out of the budget deficit, he suggested that the trend rate of productivity growth is now about 3%. That's at the high end of most economists' forecasts and is even faster than the 2 1/2% rate of the 1996-2000 boom.

At that same budget hearing on Feb. 25, Greenspan also came clean on another subject of critical importance to monetary policymakers: What constitutes price stability? In response to a question about inflation targets, the monetary maestro indicated that measured inflation of about 1% is equivalent to price stability, after taking into account the biases in the consumer price index compiled by the government.

The bottom line for Fed policy: Even if the economy keeps growing at 4% and unemployment continues to edge down, Greenspan won't necessarily raise rates. What he'll be watching is prices and price pressures. If inflation shows signs of a pickup, he'll tighten credit.

But why, after years of reticence, is Greenspan finally clarifying what he thinks the parameters of the New Economy are? Perhaps it's because he's in the twilight of his Fed career. After 16 years atop the central bank, Greenspan is widely expected to step down within the next year or two. Once he does, his opinions about the economy will carry less weight.

That may be why he's also speaking out forcefully on such prickly political issues as Fannie Mae and Freddie Mac as well as Social Security. He has long worried that the pell-mell growth of Fannie and Freddie poses a risk to the financial system. But now he's taking his concerns public and has urged Congress to rein them in before it's too late.

Greenspan's call to reduce Social Security benefits wasn't new. He has said that countless times. That's why, associates say, he was surprised by the political firestorm that greeted his remarks. But he doesn't regret making them. With the clock ticking, now's the time to speak out. By Rich Miller


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