Greenspan's Fed future in doubt

The chairman's blunt criticism of Bush's tax-cut proposal leads to speculation that he either will retire or be replaced after the 2004 election

By William Neikirk
Tribune senior correspondent

February 24, 2003

WASHINGTON -- When he publicly undercut President Bush's proposals to stimulate the economy, Alan Greenspan opened the door to widespread speculation that his career as chairman of the Federal Reserve may be drawing to a close.

The Fed chief angered the White House and many Republicans on Capitol Hill when he testified recently that Bush's proposed tax cuts were premature and that they should be offset by tax increases or spending reductions to keep the deficit under control.

Few people cross a president and the political party running Congress and still survive. To many veteran observers of the central bank, Greenspan's blunt assessment meant he either will retire as Fed chief next year or will be replaced by Bush, though perhaps not until after the 2004 election.

The chairman, who turns 77 next month, isn't talking about his future. The White House is keeping mum about Bush's intentions, and any speculation about replacements of Fed chairmen easily can be off-base. Still, many who read Fed tea leaves think the signs point to a change in a year or two.

Whatever happens, most analysts agree that any move by Bush to take Greenspan off the public stage would have to be deft and respectful of his stewardship of the economy during some turbulent years. Though Greenspan has lost some luster in recent years, he's "got an enormous amount of credibility," said former Federal Reserve member Lyle Gramley.

Greenspan's four-year term as chairman runs out June 20, 2004, and his 14-year term as a member of the Federal Reserve Board expires in 2006. This timing has led many analysts to speculate that Bush will ask the Fed chief to stay on until after the election.

"If he says, `I would like one more term,' they might not give it to him," said Christopher Probyn, an economist at Boston's State Street Bank.

A thorn in Bush's side

That assessment is based on the fact that Greenspan has been a thorn in the side of two presidents named Bush. In the 1992 election campaign, he provoked White House ire when he withstood pressure to pump more money into the economy and drive interest rates lower. Bush's father lost that election, and he and many aides put some of the blame on the Fed chairman.

The current president recognized Greenspan's importance from the beginning. In his first trip to Washington as president-elect in 2000, the first person he visited was Greenspan. The central bank chairman, with a sensitive ear to the shifting pitches of politics, later gave a qualified endorsement of Bush's $1.35 trillion tax cut in 2001.

But on Feb. 11, the chairman told the Senate Banking Committee that Bush's new tax-cut proposal was premature because the economy might be in the midst of a recovery. He endorsed Bush's proposal on dividend tax cuts but said any revenue loss would have to be offset with spending cuts and tax increases. And, he said, the deficit raises long-term interest rates, contrary to White House economic statements.

Greenspan was largely expressing long-held views, but he did it without his usual care and caution. "It certainly suggested he is not fighting for another term," said David Wyss, chief economist at Standard & Poors. He added that Greenspan doesn't have anything to prove anymore and has decided to "just say what he believes."

"I don't think he wants to be reappointed," said William Niskanen, chairman of the Cato Institute, a libertarian-leaning think tank and a former economic adviser to President Ronald Reagan. He predicted Bush would name a new chairman after the election.

Wyss went so far as to predict that Bush would name a new Fed chairman 12 months from now, and would ask Greenspan to stay on until the new person is confirmed. This would be early enough in an election year so that it would not turn into a huge issue, he said.

Asked whether Wall Street would support a new chairman, Wyss said, "It depends on who they replace him with. There is no longer a feeling that Greenspan walks on water. Greenspan is getting old and he won't be there forever."

Interest rates guide economy

First named chairman in 1987, Greenspan used the central bank's control over short-term interest rates to guide the economy through two recessions and disruptions such as the Asian financial crisis and stock market crashes. He was seen as one of the prime architects of the 1990s boom, preaching that higher productivity and low inflation enabled expansion.

Investors hung on his every word, indeed almost every twitch. But now, after cutting interest rates 12 times and trying to lift a sluggish postboom economy, Greenspan's stock, like the market, is down. John Silvia, an economist at Wachovia Bank in Charlotte, N.C., said Greenspan is a "wonderful Fed chairman," but added that the time may be approaching for a change of leadership.

"We need a different cutting edge," he said. "His view of the `new economy' and productivity growth may have been misstated. He was just too much a champion of the new economy."

But Neal Soss, an economist at Credit Suisse First Boston, said Greenspan's future depends on the course of the economy. If it rebounds strongly and is not a major issue next year, he said, it would diminish talk about his leaving.

Stephen Moore, an economist and head of a political action committee that seeks to elect conservative candidates, said Greenspan's candid remarks about Bush's proposals upset the White House, but he added that the last thing the president wants is a "mini-panic in financial markets" caused by ousting the Fed chairman.

And there are no obvious replacements to Greenspan, Moore added. Harvard University economist Martin Feldstein and Treasury officials John Taylor and Peter Fisher are among frequently mentioned candidates, but none has the stature of a Greenspan.

Copyright © 2003, Chicago Tribune

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