On May 18, US President George W. Bush nominated Alan Green-span for another four-year term as chairman of the Federal Reserve Board, a position he has held since 1987. This is the glamor and honor that Greenspan holds in Washington.
Among Greenspan's great services to his country, those most worth mentioning are his rapid and solid response to Black Monday, Oct. 19, 1987, when the Dow Jones Industrial average fell 22.6 percent, the largest one-day decline in market history; the assurance of keeping the US from being affected by the Asian and Russian financial crisis in 1997 and 1998; and the swift restoration of economic order in the US following the Sept. 11 terrorist attacks, which was followed by the longest sustained economic growth period in US history. Wall Street believed that under the leadership of Greenspan, with his precise prediction of the economic cycle and extraordinary perception in solving the financial crisis, the US economy would continue its endless expansion.
For several decades, the US has played the role of a locomotive for the global economic recovery and its economic system is a somewhat liberal one driven by market forces. Neither a Ministry of Economic Affairs in charge of economic development strategy, industrial policies, preferential tax treatment nor foreign exchange reserve policies to rein in the foreign exchange rate have been set up or deployed in the US.
The only dependent panacea is "interest rates." While the whole world enjoys the euphoria of expected economic upturns, Greenspan himself has to act like a raven shrieking out his worrisome warning signal of future interest rate hikes. With China's economic tightening policy, rising oil prices, the burden of the US-Iraq war and the trade deficit at more than 5 percent of GDP, Greenspan, beneath his fair appearance and high reliability, indeed faces a dilemma.
The US economy has in fact performed well during the past quarter. GDP growth for the first quarter of the year reached 4.2 percent, while the retail sector grew at 1.8 percent, the highest growth in a year. Durable goods orders increased by 3.4 percent, exceeding expectations more than four times. As the US economic recovery picks up speed, an interest rate hike by the Fed should be dependent on employment and inflation figures. The consumer price index edged up 0.2 percent in April, climbing for the fifth consecutive month. Following a slight drop in the unemployment rate, the Fed could move the interest rate hike forward.
The pre-warning system regarding interest rate changes by the Fed actually has a historical background. Although the Fed's tightening policy in 1994 brought steady growth to the US economy, it also caused great shocks in the bond market and led to the bankruptcy of Orange County, California, due to trading losses in the derivatives market and other similar incidents. The Fed therefore no longer makes a secret of when it plans to put an end to low interest rates, and also tries to let the market understand its policy orientation to avoid any unexpected impact.
Having had no choice but to adopt a policy of low interest rates in recent years, Greenspan has successfully rescued the economy from the brink of a vicious deflation cycle. Even though the economic recovery is finally around the corner, Greenspan is stuck in a stalemate of having to enhance economic growth while subduing inflation. It is very dangerous for the US to maintain a 1 percent interest rate level with its current economic growth rate of approximately 5 percent. To prevent inflation from spiralling out of control, the unprecedented low interest rate policy must be adjusted. The interest rate hike is only a matter of time. While the US is faced with high oil prices, an enormous trade deficit, a hefty budget deficit and private debt, and the potential threat of international terrorism, the Fed is in a very difficult position for making policy decisions.
In other words, the strength and speed of the economic recovery may balance out the factors which would cause a premature interest rate hike to halt the recovery; on the other hand, inflation could get worse and the US dollar could become weak if the hike does not come at the right time. In addition, as the US presidential election approaches, an interest rate hike becomes more sensitive. If it is done before the election, it could affect the election. But if the Fed waits until after the election, it might be too late. Based on this assumption, it is likely that the interest rate will edge higher only slightly after the Federal Reserve Board meeting in late June as a warning to the market, and that a final decision will be postponed until after the election.
Frankly speaking, Greenspan's performance during the past decade is more than brilliant in his approach to adjustments and timing of changes in the interest rate. It is a global trend that the monetary policy of the central bank in a democratic country should be free from political interference. Governments in liberal economies prefer to let the central banks handle interest rate policies without interference. Having an independent central bank has its political advantages, since governments can take the credit when things go well and evade responsibility when they don't.
Greenspan has had a profound significance to the boom and bust of the global economy over the past 10 years. An imprudent statement from him could impact heavily on international economies. With the current transparency of market information and the aid of IT systems in making rational forecasts, Greenspan, who holds the single interest rate ace in his hand, is daring to play against speculators around the world. If he succeeds in grasping the market sentiment, Greenspan will have more leeway to come up with a cure.
Wea Chi-lin is chairman of the Land Bank of Taiwan.
TRANSLATED BY perry svensson
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