Greenspan the activist gets bolder

One Wall Street analyst now calls Alan Greenspan a "crazy guy." He means it as praise.

In the twilight of his career, Mr. Greenspan has turned the Federal Reserve - traditionally the most conservative of US institutions - into one of the most aggressive manipulators of interest rates in US history.

Indeed, he and his button-down colleagues at the Federal Reserve are pursuing a monetary course that, by historic US and contemporary world standards, is almost radical in trying to revive a slumping economy.

While the two other key central banks in the global economy - the Bank of Japan and the European Central Bank - have been moving cautiously, the Fed this year has lowered rates proportionately more than at any time since World War II. Another cut in short-term interest rates, expected yesterday, would mark the tenth drop by Greenspan & Co. since early January, bringing rates to a 40-year low.

"This is quite extraordinary," says Allen Sinai, chief economist for Decision Economics, a Waltham, Mass., consulting firm.

The reason for the dramatic action is both personal and economic. Greenspan would clearly prefer not to end his tenure in the middle of a recession, and the US economy has shown reluctance - even balkiness - in responding to the the board's moves so far.

That was painfully evident again Friday, when the government reported that unemployment in October jumped from 4.9 percent to 5.4 percent. Because of the sudden spurt, most Fed watchers were expecting Greenspan and his crew to reduce the so-called federal funds rate by half a percentage point yesterday, to 2 percent. (The Fed's announcement came after the Monitor's deadline. The alternative would be a quarter-percentage point drop.)

At 2 percent, the Fed funds rate will have been slashed 60 percent in 10 months, from 6.5 percent at the start of the year. When Fed chairman Paul Volcker used aggressive monetary tactics to fight inflation in the 1970s, the Fed funds rate moved down more points. But, proportionately, it was less than what Greenspan has done.

"We would probably be in a much worse economic funk without [this year's rate cuts]," says Peter Kretzmer, an economist with BankAmerica Corp. in New York.

Commercial banks, which charge one another the Fed funds rate on overnight loans, haven't seen such rates since September 1961. But economists remain uncertain as to how fast the moves will turn the economy around, or how much.

Up to this point, businesses, and more recently consumers, have been reluctant to spend money despite the lower costs of borrowing. Both are saving more than spending - a sign of a lack of confidence. The tentativeness has been heightened, dramatically, by the events of Sept. 11.

In theory, the Fed could continue to lower rates, all the way to zero, if the economy doesn't respond. And it very well might. "They will go as low as they have to go to effect a recovery, as long as there is no inflation risk," says Mr. Sinai, who sees no such risk at the moment.

Jack Lavery, an economic consultant in Washington Crossing, N.J., says he "wouldn't be surprised" if the Fed drops rates to 1 to 1.5 percent in the next month or so.

Such a move wouldn't be unprecedented, either here or abroad. Japan's central bank has kept interest rates close to zero for years. But the economy there remains in recession. Sinai blames that on the business community's lack of confidence in the economy after a decade of doldrums. He sees "some risk" of the same happening in the US.

"There are rare times in history when the private sector simply doesn't respond" to low interest rates, he says.

Still, when the low rates are coupled with falling oil prices and the prospect of further tax cuts and more federal spending, most experts anticipate an upturn relatively soon. The only disagreement is whether it will come early next year or in the second half of 2002.

James Glassman, chief economist at J.P. Morgan Securities in New York, notes that consumers did react to the zero-interest rates car dealers were offering last month. Purchases hit record levels. Housing sales also have held up well with low mortgage rates. "People are rational," Mr. Glassman says. "Give them a good deal, and they will jump."

There are other reasons the US economy may be about ready to respond. Since World War II, the US has experienced nine recessions. The average length of these has been 11 months. The current recession, the 10th, may have started in the summer, or possibly even last April when industrial production was down substantially. That means it may already be as much as six months old.

As for the Fed, its aggressive move on interest rates isn't the only thing that has set it apart under the stewardship of the bespectacled Greenspan. In the late 1990s, the man known for his cautious and equivocating pronouncements also acted unorthodoxly by letting the jobless rate fall to 3.9 percent. Most economists thought inflation would be reborn with a rate below 6 percent.

Historically, keeping inflation in check has been the primary mission of central banks. If a nation suffers dramatically rising prices, it usually marks a severe blow to the reputation of the presiding central banker.

The refusal of the Bank of Japan, for instance, to take more extreme measures to pump up the domestic economy has been rooted in part in its inflation-oriented policies. As a result, the governing party last week advanced legislation that would take away some of the bank's independence.

Similarly, the European Central Bank is under growing pressure to take more aggressive action on lowering interest rates. It may do so as early as today.