By Nell Henderson
Washington Post Staff Writer
Sunday, August 28, 2005
JACKSON HOLE, Wyo., Aug. 27 -- Federal Reserve Chairman Alan Greenspan expressed confidence Saturday that the central bank will meet the challenges that lie ahead after he steps down next year from the institution he has led for nearly two decades.
"I have little doubt that my successors, and theirs, will continue to sustain the leadership of the American financial system in an ever-widening global economy," Greenspan said at the conclusion of an economic conference here devoted to assessing the legacy of his 18-year tenure as Fed chief.
On a rare personal note, Greenspan said he will miss debating economic trends with Fed policymakers and staff.
"The Fed is a remarkable institution," he said, praising its combination of technical expertise, sophisticated academic understanding of the economy and sensitivity to financial markets in crafting interest rate policy.
His remarks were greeted by a standing ovation from the conference attendees -- a mix of Fed officials and staff, central bankers from around the world, academic economists, Wall Street analysts and journalists.
In remarks Thursday night, as the conference opened, Greenspan spoke warmly about the collegiality of the Fed, a quality other officials and staff attribute in large part to his personal style.
Greenspan warned Saturday that the Fed will face "as many uncertainties over the next 18 years as it has over the past 18."
For example, he said, the aging of the U.S. population will create pressures on the Fed and Congress. He has warned repeatedly this year that he believes the government has promised more to future retirees, through Social Security and Medicare, than the nation can afford to deliver. He has urged Congress to scale back those commitments to avoid ruinous federal budget deficits or much higher taxes.
The Fed "cannot ignore the potential inflationary pressures inherent in our current [federal budget] outlook," he said, referring to central bank actions in many countries in the past to make government debt easier to repay by stimulating the economy and allowing prices to rise rapidly.
But Greenspan said he assumes the government will act to prevent the retirement programs from causing such budget stress. And he made it clear he believes the Fed, in any case, would resist any political pressure to allow inflation to take off.
Several economists at the conference have cited the reduction of the trade gap, measured most broadly as the "current account deficit," as a process that will present challenges to Greenspan's successor, whomever that turns out to be.
And Greenspan said he expects the Fed to continue refining his "risk management" approach to making interest rate policy. He has outlined it previously as one in which policymakers weigh the various risks to the economy and the potential consequences of each. They then address the most dangerous one, rather than the most likely.
In 2003, for example, Fed policymakers believed there was a small but real risk of deflation, a dangerous drop in the overall price level. They acted to prevent it by lowering interest rates to very low levels, even though that action carried with it the risk of possibly higher future inflation.
Greenspan argued at the conference, as he has before, that this is the best approach in a world of uncertainty and ever-changing technology, markets and economic relationships.
The Fed chief's "excellent record" strengthens the case for the risk management approach, said Allan H. Meltzer, an economics professor at Carnegie Mellon University and author of a history of the central bank, in remarks Friday.
Referring to Greenspan's early years playing in a jazz band, Meltzer said the Fed chief's policymaking "saxophone hit many more right notes than wrong."