Greenspan Likely to Take Active Approach
Friday, January 5, 2001 By Martin Crutsinger
WASHINGTON — Alan Greenspan, whose hallmark as Federal Reserve chairman has been the deft use of incremental "baby step" changes in interest rates, demonstrated this week that he also is willing to employ more dramatic methods to protect the economy if need be.
And the Fed's unexpected announcement of a one-half percentage point cut in a key interest rate, the biggest reduction in more than eight years, is not likely to be the only surprise Greenspan pulls from his hat this year.
Economists believe the Fed plans to engineer a string of interest rate cuts to bolster the sluggish economy in coming months. Many believe Greenspan is also likely to publicly endorse tax cuts to boost growth, although at a smaller amount than the $1.3 trillion package being proposed by President-elect Bush.
"I am betting that in the next few weeks, we could hear Greenspan shock us with the news that if the tax cuts are tailored in the right way, they would be an appropriate complement to the Fed's easing moves," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.
While Greenspan in the past has favored using the huge projected surpluses to pay off the national debt, he has left himself an opening to support tax relief by saying he preferred tax cuts to increases in government spending.
"Greenspan's opposition to tax cuts was always hedged. It is not that he's against all tax cuts. He was concerned about the size of the tax cuts," said former Fed Vice Chairman Alan Blinder, now an economist at Princeton University.
Blinder and other analysts said Greenspan would justify his modification on tax policy by citing the more-severe-than-expected slowdown in the economy, the same reason that the central bank gave in making its announcement Wednesday.
The Fed cut its target for the federal funds rate, the key interest rate it controls, by one-half percentage point to 6 percent, taking the action after Greenspan convened an emergency one-hour telephone discussion Wednesday morning.
The Fed accompanied the cut in the funds rate with reductions that pushed the largely symbolic discount rate, the interest that it charges to make direct loans to banks, down to 5.5 percent, accomplishing the change in two quarter-point moves taken on Wednesday and Thursday.
The Fed had not changed interest rates outside of its eight scheduled meetings each year since October 1998. Then, it approved a quarter-point cut, one of three in succession to keep the Asian currency crisis from derailing the U.S. economy.
Analysts were split on whether the Fed would move rates down further at its Jan. 30-31 meeting, but all believed more rate cuts are coming. Jones said he looked for a total of four quarter-point moves at the Fed's meetings in March, May, June and August.
Many analysts said that it was accumulation of weak economic reports, including slumping auto and retail sales and a plunge in a key index of manufacturing activity that pushed the Fed into action this week.
"It is very clear by his actions that Alan Greenspan is very concerned about the economy going downhill too fast," Blinder said.
Many analysts said Greenspan's aggressive stance reflected his desire to avoid repeating the mistakes of a decade ago when the Fed moved too slowly and the economy toppled over into the 1990-91 recession, a downturn that President-elect Bush's father blamed for costing him the 1992 election.
But in moving so dramatically on Wednesday, economists said there was also a danger that it could prompt fears in the markets that Greenspan and his colleagues believe the economy is in even worse shape than believed.
Diane Swonk, chief economist at Bank One in Chicago, said the unfolding gloom has been fed partly by frequent worries expressed by Bush and running mate Dick Cheney of the threats of a recession.
"The 'R' word has become commonplace in part fueled by the incoming administration's efforts to build support for tax cuts," she said. "That could come back to haunt them if the markets think the Fed is panicking."
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