Nation's Inflation Buster Poised For Another Stint in Fed Saddle
ON Aug. 11, 1987, a gallon of gasoline cost 99 cents and a gallon of milk sold for $2.16.
Today, the gas costs $1.12 (up 13 percent) and the milk runs $2.80 (up 29 percent). In fact, over the past nine years, inflation has climbed only 34 percent.
The main reason for the low inflation rate during this period is the man with his foot on the monetary brake - Federal Reserve Board chairman Alan Greenspan.
Mr. Greenspan is a poker-faced economist, a fan of tennis and Ayn Rand's writings, a man whose public statements are often considered impenetrable.
As the official with the greatest influence over what happens to America's money supply, he is one of the most powerful people in the country. And by March 2, and possibly as early as this week, President Clinton is expected to nominate Greenspan for another four-year term to make sure the future price of milk and gas stays low. The nomination, expected to be confirmed without any real dissent in the Senate, will allow Greenspan to continue his policy of ''price stability.''
''No other chairman has done as well as Greenspan over the past 25 years,'' says Charles Plosser, dean of the William Simon Graduate School of Business Administration in Rochester, N.Y.
''The inflation rate has been falling consistently since he took office,'' says Christopher Low, senior economist at HSBC Markets. When Greenspan arrived, the inflation rate was running near 5 percent per year. Over the past four years, it has been below 3 percent per year.
Greenspan's preoccupation with keeping prices in check has even turned heads on Capitol Hill where job creation back in the district has always been as important as keeping the lid on the cost of groceries.
The Fed chairman has been so effective at holding prices down and stressing the importance of his mission that there's some interest on the congressional Joint Economic Committee to sanction this approach for whoever follows Greenspan. ''When the dollar was linked to gold it was as good as gold, but now it is only as good as the guy who runs the fed,'' Mr. Low says.
Critics complain that Greenspan is too stingy. Fed watchers say he was not Clinton's first choice. ''Clinton would prefer an easier Fed and faster economic activity,'' speculates economist Paul Kasriel, at Northern Trust Company in Chicago.
Clinton had planned to nominate Felix Rohatyn, head of the New York-based investment banking firm Lazard Freres & Co., as vice chairman to replace Alan Blinder who recently resigned to return to Princeton University. Mr. Rohatyn, a big democratic party fund-raiser, was expected to press for greater economic growth. But Sen. Connie Mack (R) of Florida, chairman of the Joint Economic Committee, complained that Rohatyn was too liberal. Without any Republican support from the Senate Banking Committee, Rohatyn on Tuesday withdrew his name from consideration.
Although Greenspan is a Republican, Clinton has gotten along well with him. Greenspan supported the administration when it decided to provide financial support to the Mexican government. And, during one of his State of the Union addresses, Clinton gave Greenspan the high-profile seat next to the first lady. He has also supported the administration's deficit-reduction plans.
Another Greenspan term would also be popular on Wall Street. Over the past four years, the stock and bond markets have rallied, providing billions of dollars in trading profits for investors and financial firms.
''A known quantity is always good for the markets when it comes to the Fed chairman,'' says Dan Seto, an economist with Nikko Securities Company International in New York.
Although the Fed does not reveal what data it uses to make decisions, Greenspan has a reputation as an economist interested in the details that make up the broader economic picture. ''The most important thing he looks at is industry breakdowns of order shipments, car loadings, and data well below the level most people look at,'' says Brian Fabbri, an economist with Paribas Capital Markets in New York.
Greenspan uses the orders and shipments as a kind of leading indicator for the economy. He is also known for making incremental interest-rate moves as opposed to large symbolic rate changes. ''He does it one-quarter of a point at a time,'' says Mr. Fabbri.
Greenspan has stuck to this approach even when some economists have argued the economy needed greater stimulus. Since last July, Greenspan has lowered interest rates three times by one-quarter of a percentage point. Now, many economists say the economy is barely moving.
Economist Donald Straszheim of Merrill Lynch & Co. says the gross domestic product is growing by only 1 percent this quarter and will show only 2 percent growth in the second quarter. With such nominal growth, he predicts the Federal Reserve will lower rates by another one-quarter of a percent next month.
If the Fed cuts rates, it will make an announcement right after its next policymaking meeting. This is one of Greenspan's contributions. In the past, economists would try to guess at the Fed's intentions on the basis of its market activity. Under Greenspan, some of the mystique has been removed. Most economists think that helps provide stability to the markets.