Washington — With stock markets wobbling and fears of a U.S. recession growing, Federal Reserve Chairman Alan Greenspan will lead a Fed board meeting today to decide on steps to avert a serious economic downturn.
Wall Street analysts expect the Fed to cut interest rates by at least a half a percentage point.
Until early this year, it seemed that the Fed chairman could do no wrong; a Greenspan victory in the battle against recession was a foregone conclusion. But now, as the economic news turns increasingly sour, his reputation has taken some hits and there are growing doubts about whether he can guide the once high-flying U.S. economy to something better than a crash landing.
"We're going to find out this time whether he really walks on water or just swims well," said David Wyss, the chief economist at the Standard & Poor's bond rating agency in New York.
Outstanding record
Greenspan still is held in high esteem, even by most of his critics. If anything, the souring economy suggests that financial markets and public expectations of Greenspan were inflated, and that he is human after all. But he may have become a victim of the overblown reputation his record has inspired.
In the 13-plus years since he became Fed chairman in 1987, the United States has endured just one mild, eight-month recession from July 1990 to March 1991. Since then, the economy has been in the longest uninterrupted period of growth in U.S. history.
While neither the Fed nor Greenspan would claim full credit, their interest rate policies are a key factor behind that record.
Greenspan chairs the powerful Federal Open Market Committee, the 12 Fed governors who meet eight times a year to determine U.S. interest-rate policy.
They cut interest rates when they want to stimulate the economy to fight recession, and they raise them to slow the economy to prevent inflation. Lower rates encourage spending by making it easier for consumers and businesses to borrow money.
Greenspan widely is credited with preventing the 1987 stock market crash from bringing down the economy, staving off inflation in 1994 and preventing the spreading financial crisis that began in Asia from reaching U.S. shores in 1998. He declined to be interviewed for this article.
"His reputation was built up over a decade," said Alice Rivlin, who served with Greenspan as vice chairman of the Federal Reserve from 1996 to 1999.
By last year, he had become larger than life.
The economy was booming, growing so fast that most economists feared it ultimately would crash. Greenspan agreed, and the Fed raised interest rates. Analysts were confident that he would succeed in bringing the high-flying economy in for a "soft landing," slowing the economy a bit without shoving it into a recession.
It's no easy task, not even for Greenspan.
His next challenge
Now the United States seems headed for a landing that will be bumpy at best. Some analysts believe the economy already is in recession, a period of shrinkage instead of growth.
And the second-guessing has started.
"Policymakers made a tactical error when they didn't lower interest rates earlier this month," analyst Mark Zandi wrote after the stock market crashed last week. Zandi is the chief economist at Economy.com., a West Chester, Pa., consulting firm. In early March, he criticized the Fed's decision to leave rates unchanged.
But public perceptions of the Fed's influence fed by the media may be exaggerated.
"What we've done is elevate the Fed to this kind of all-powerful economic stabilizer that is way beyond anything economists would agree is realistic," said Charles Plosser, dean of the University of Rochester business school and co-chair of the Shadow Open Market Committee, a group that evaluates Fed policy.
Although Greenspan is a master at analyzing economic statistics available and using them to figure out just how the economy is doing, the data are never timely enough to give a precise picture of today's economic conditions. And interest rates have their limits as a tool to control the economy.
"It sets up expectations which are hard to realize," said Mortgage Bankers Assn. economist Lyle Gramley, who was a Fed governor from 1980 to 1985. "Some of the luster has come off (Greenspan) since the beginning of the year with the collapse of the stock market. I think people are blaming him unjustly for what has happened."
Mixed endorsement
Greenspan didn't help his reputation when he surprised lawmakers by endorsing President Bush's proposed tax cuts soon after Bush took office. Before that, Greenspan had advocated using the surplus to reduce the federal debt.
Most analysts say they believe Greenspan changed his position based on valid economic reasoning about changed conditions. But several agreed that it could be harmful.
"I think it created an erosion of confidence," said Justin Martin, the author of "The Man Behind the Money," a biography of Greenspan. "One thing crucial to the Fed is to remain independent (of politics). That move, whatever motivated it, the perception was that he was kowtowing to a new president."
However, the greater concern for many observers is what happens when Greenspan, who turned 75 earlier this month, steps down. His term as chairman expires in June 2004.
"What I worry about is what will happen after Greenspan is no longer chair," Plosser said.
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