The Fed in an election year

International Herald Tribune
11-10-2003
Alan Greenspan may be in for a rough election. Indeed, if you ran the Federal Reserve, you'd probably just want to take off every fourth year. A presidential campaign can be an awkward time for the United States' independent central banker, who has more power to influence the economy quickly than any single branch of government, even though it is the president who gets the lion's share of credit or blame for how things are going. President George W. Bush's father unfairly blamed Greenspan for his defeat by Bill Clinton in 1992, claiming that Greenspan was too slow to cut interest rates, delaying a recovery. This history only makes Greenspan's present challenge more delicate. The quandary facing the Federal Reserve will not be how much or how fast to cut, but how much and how fast to raise, its crucial overnight interest rate, now at a 45-year low of 1 percent. Just two weeks ago, the Federal Reserve opted to leave that rate unchanged, and it issued a statement suggesting it would not act for a ''considerable period.'' But the continuing flurry of positive economic data should force Greenspan to shorten his time horizon. Since the Fed spoke, we have learned that the U.S. economy grew at a blistering 7.2 percent annual rate in the third quarter. Manufacturing, construction, corporate profit, consumer spending and productivity numbers have all been impressive. Most significant, the economy is finally adding jobs after being battered by the overhang of the popped Internet bubble, terrorism, corporate scandals and the war with Iraq. More than a quarter-million jobs were created in the last two months, according to figures released Friday, and plummeting new claims for unemployment benefits suggest the labor market will only get stronger. The unemployment rate now stands at 6 percent, down from 6.4 percent in June. A new Gallup poll shows that most Americans feel the economy is improving. Nobody is yet suggesting that these are the best of times. The United States will be hard pressed to regain anytime soon the 2.5 million jobs lost during the Bush presidency. Still, it's clear that these record-low interest rates, which sustained consumer spending during the slowdown, are no longer prudent. The Bank of England last week became the first major central bank in three years to raise interest rates, and Greenspan will have to do the same soon or face flirting with inflation. You can expect the Fed to prepare markets for the turnabout when it next considers rates in December, and then to take action in the spring. Greenspan cannot allow the political calendar to make him trigger-shy. There is always a concern that a rise in interest rates will derail a recovery, or spook the stock market. But in this case, if a modest increase from such extraordinarily low rates is done carefully and deftly explained, Americans will understand that it is a vote of confidence in this recovery. Democratic presidential candidates may have to adjust their pitch in reaction to an improving economy, but they can remind voters that their party pushed hard for tax cuts aimed at working families that did provide a stimulus, while resisting the larger, regressive cuts that have pumped up the budget deficit. This brings us to a second election-year quandary for Greenspan, who lectured President-elect Clinton in late 1992 about the dangers of large deficits. He should speak forthrightly again, now that Bush's recklessness has resurrected the danger. To his credit, the Fed chief did just that in a speech last Thursday. Continuing to do so will not be easy in an election year. But then, if Greenspan had been more adamant about warning about the dangers of huge deficits when Congress first sought his views on the tax cuts, he might be facing a smoother election year.

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