Sun, Sep 25, 2005 - Page 11 News List

New Fed head to face more global issues

BLOOMBERG

US Federal Reserve chairman Alan Greenspan has been the most globally minded Federal Reserve chairman in history. His successor will have to be even more so.

Greenspan, whose term ends in January, yesterday met fellow central bankers and finance ministers at the G7 meeting in Washington. The Fed's next leader will inherit an economy more influenced than ever by foreign forces, complicating the task of setting US interest rates.

"The Fed must keep its eyes open on the world economy because it's so darn important to our economy," said former Fed governor Laurence Meyer, now vice chairman of Macroeconomic Advisors LLC in St. Louis. "The world economy is now much more complicated, and that creates challenges for the next chairman."

Among the possible challenges posed from overseas: Rising oil prices fanning inflation, the dollar being undermined by an unprecedented US trade deficit, market interest rates set by foreign demand for US government securities and the loss of US jobs to cheap labor markets in China and India.

The world economy swelled to US$44 trillion from US$17 trillion since Greenspan, 79, joined the Fed in 1987, with the US accounting for a quarter of the total. China's economy is now the seventh largest in the world, eclipsing Canada. The Internet and the end of communism mean nations are now more intermingled: Workers in India can now perform tasks for companies in Indiana.

Greenspan has attended more G7 meetings than any other central banker. The group is adding a meeting in London in December in part to mark Greenspan's retirement, a US Treasury official told reporters on condition his name not be used.

Where once the central bank regarded international issues as an "irritation, now the Fed needs to think about the rest of the world," said Ted Truman, a senior fellow at the Washington-based Institute for International Economics who ran the Fed's international finance division from 1977 to 1998.

Former Fed vice chairman Alan Blinder said the Fed should even sometimes shift interest rates to help economies elsewhere if doing so would have no adverse impact on the US.

"The US economy is so large, and the Fed is so central to the global financial system, that the Fed's influence spreads well beyond our borders," Blinder, now a professor at Princeton University in New Jersey, said in a study co-written with Princeton colleague Ricardo Reis.

"Shouldn't the Fed therefore behave like a good citizen of the world?" Blinder said.

For his own part, Greenspan last month told the annual central banking retreat in Jackson Hole, Wyoming, that he's confident his replacement will meet the international challenges.

"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.

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