Alan Greenspan, the new chairman of the Federal Reserve Board, believes he's learned more about the mechanics of monetary policy in the two months he's been on the job than in the past couple of years -- even though, since the late 1950s, it's been his business to stay close to the Fed and its managers and advise clients on interest rates and related matters.
As much as Greenspan wanted to be chairman of the powerful Fed, he thought it was going to be a bit boring. But he finds that he is exhilarated by the challenge, one that is unexpectedly complex.
Those who know the 61-year-old Greenspan well aren't surprised by the manner in which he's thrown himself into the job: He has always been a serious student of the economy, especially the technical side.
But private "experts" will be surprised if they persist in believing in their own stereotypical vision of how Greenspan, as a conservative economist, will run the nation's central bank. Tap the average analyst on Wall Street today, and he'll tell you that Greenspan must prove his virility -- his right to fill Paul Volcker's big shoes -- by pushing interest rates higher.
Didn't Greenspan produce an increase in the discount rate, from 5.5 percent to 6 percent in his first few weeks at the Fed, they ask knowingly. More discount rate increases are on the way, they promise. Robert Hamrin, writing for the Washington Intelligence newsletter published by Van Dyk Associates Inc., says that with a vulnerable dollar, there is "a high probability" that the Fed's discount rate will go up one more time, and maybe twice before the end of December.
Hamrin is sketching out the majority opinion, and it may happen that way. But Greenspan is known to have a different view. In part, he outlined his skepticism on "This Week With David Brinkley" last Sunday, when he said plainly that he saw no sign that "inflation is picking up," and suggested that interest rates may actually come down.
Greenspan does not believe that Wednesday's half-point increase in the banks' prime rate betokens another increase in the discount rate, as some market analysts were predicting. Looking carefully at what the forward markets in foreign exchange seem to be saying, he is also known to feel that the dollar will not fall sharply, as economist Stephen Marris of the Institute for International Economics and others forecast. If the dollar were to plunge as much as the doomsayers predict, Greenspan believes, it would already have happened.
For the moment, anyway, the dollar is stable -- even with the increase in Japanese interest rates one full point more than that in market interest rates here. Whether the dollar can continue on a steady course without higher interest rates or a continuance of massive intervention is not clear. Almost every banker I interviewed at the recent International Monetary Fund/World Bank meeting predicted at least a 10 to 15 percent drop in the value of the dollar against other currencies over the next several months.
Would Greenspan combat such a dollar decline with a burst of higher interest rates? Some say that monetary policy has become a hostage to the dollar. While Greenspan can't be expected to tip his hand, there may be a clue in his confirmation testimony. When asked whether domestic or international considerations would get priority in making policy, he said he doesn't think in terms of "50 percent this, 50 percent that." Rather, the test of policy, he said, is the impact of any action on long-term, stable growth in the United States.
So the key to doping out the kind of leadership Greenspan will provide at the Fed is to ask the question: Do you believe the economy is now operating at capacity? Many economists, such as Nobel Prize winner Franco Modigliani, have come to think that with the jobless rate at or below 6 percent, the economy is operating at close to full employment, thereby opening up the risk of a new inflation. That would require a rising interest-rate joyride.
But Greenspan is known to think that the answer to this critical question is: "No," we haven't yet reached full employment.
Throughout his career as a private economic adviser, and as chairman of the Council of Economic Advisers, Greenspan has placed great emphasis on a single yardstick to measure how close we are to full employment: the lead time on delivery of materials in the manufacturing process.
As yet, he believes there is no backing up of orders. And despite the low unemployment rate, he thinks there is still room for economic expansion before inflation is touched off.
Nonetheless, judging by his appearance on the Brinkley show, Greenspan doesn't want anyone to think he has forgotten about inflation, or that he thinks there never will be a recession. "The business cycle has not been repealed," he said last Sunday.
What appears to bother him is that the markets, here and abroad, have talked themselves into the inevitability of rising inflation, rising interest rates and a collapsing dollar. If it's so obvious that the dollar will go down, who is doing all the buying, Greenspan wonders.