REVIEW & OUTLOOK (Editorial): Greenspan's Recovery
The White House says the recession is over, and the anecdotal evidence suggests a recovery has begun. The lackluster response in financial markets, however, suggests widespread doubts that policy makers in Washington have a clue about how to sustain a recovery.</br></br>Specifically, markets have to be wondering about the delay in reappointing Alan Greenspan as chairman of the Federal Reserve. Colin Powell's first term as chairman of the Joint Chiefs of Staff expires in the autumn, and President Bush announced his reappointment a month ago. Mr. Greenspan's four-year term expires in a month, but Mr. Bush has made no announcement. Meanwhile, various aides, deputies and kibitzers tell reporters that the delay is an attempt to "leverage" the Fed to ease interest rates further.</br></br>This sounds all too much like the same advisers who urged Mr. Bush to raise taxes three months into this recession. Having abandoned their own control over fiscal policy, these advisers have since taken to lecturing Mr. Greenspan and the Fed on monetary policy. This is graceless at the least, but also probably dangerous; financial markets can see when stones are being thrown from glass houses in Washington.</br></br>Especially since Mr. Greenspan is the one U.S. official who has built some credibility in world markets lately. Amid the capital's fiscal gridlock, the Fed has had to steer the economy with its single monetary oar, and with fair results. The Fed has brought down long-term interest rates, which are the decisive rates for investment. It's done this without reigniting inflation, which except during Paul Volcker's Fed tenure, has been the expectation before every presidential election cycle.</br></br>It's true that, at 8.5% or so, long-term interest rates remain stubbornly high. But this isn't something the Fed can easily control. The Fed in the short run can dictate the fed-funds rate, which is what banks charge each other for overnight loans. And the Greenspan Fed has done this, dropping fed-funds to 5.75% April 30.