After the Crash -- On the Spot: Stock Market's Frenzy Puts Fed's Greenspan In a Crucial Position --- He Must Aid the Economy But Not Fuel Inflation; Is Tax Rise Now Possible? --- Reagan's Bipartisan Stance
WASHINGTON -- The stock market's Monday collapse has put Federal Reserve Chairman Alan Greenspan on the front line in the fight to prevent a market panic from turning into a general economic slump.</br></br>Just a few days ago, Mr. Greenspan was under pressure from the financial markets to increase interest rates and prove his willingness to fight inflation. But by yesterday, the focus had changed dramatically. After Monday's unprecedented market crash, traders and analysts were calling on the central bank to ease credit to avoid recession.</br></br>"I think Greenspan is the only candidate for restoring the confidence of the markets," said Jerry Jordan, the chief economist at First Interstate Bank Corp. "It's the chairman of the Fed, when it comes down to it, who pulls the levers."</br></br>Whether Mr. Greenspan is up to that task remains to be seen. He tried to calm markets yesterday with a one-sentence statement signaling the Fed's switch from an anti-inflation to an anti-recession policy. It said: "The Federal Reserve, consistent with its responsibilities as the nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system."</br></br>The Federal Reserve quickly backed up its statement with action, driving the federal funds rate down to about 6 3/4% late in the day from more than 7 1/2% Monday. "I think that speaks for itself," said a senior administration official when asked if the Fed had eased credit. The federal funds rate, the interest rate banks charge on loans to each other, is a sensitive measure of the tightness of monetary policy.