Greenspan Is Nominated for a Fourth Term
Alan Greenspan, who has won nearly unanimous acclaim for steering the nation through a stock crash in the 1980s, around a financial freeze-up in the 1990s and toward America’s longest peacetime economic expansion, was nominated Tuesday to a fourth term as chairman of the Federal Reserve Board.
In making the announcement, President Clinton showered the 73-year-old economist with praise. But investors, convinced that the move could presage more interest rate hikes to slow the torrid economy and financial markets, reacted by dealing stocks their worst drop in 15 months.
In announcing his choice of Greenspan more than five months before the chairman’s current term expires on June 20, Clinton was widely viewed as seeking to keep the nomination from becoming embroiled in presidential-election politics. There had been worries in some quarters that the White House might hold up the reappointment so as to pressure the Fed to keep interest rates low--and thus the good times rolling--in order to help the candidacy of Vice President Al Gore.
Perversely, however, the very effort to insulate the decision may have contributed to investors’ worries. “The near-term fear is that once you take all the politics away, the Fed is free to be as tough as it wants,” said Diane C. Swonk, chief economist of Bank One Corp. in Chicago.
And tough is what many expect the Fed to be in the coming months.
After more than three years of bucking conventional economic wisdom and holding interest rates down in the face of the kind of low unemployment and fast growth that are widely thought to spark rapid inflation, the central bank, with Greenspan in the fore, began raising rates last June for a total of three times last year. And it has signaled a bias toward further increases in the new year. Analysts said the Fed’s aim was to slow the economy from its current 4%-plus annual growth rate, which Greenspan has said he believes cannot be sustained without inviting higher inflation, to about 3%. They said that such a slowdown could require a string of rate hikes totaling perhaps a full percentage point or more. The Fed’s key rate now stands at 5.5%, and Fed rate policymakers will have their next meeting Feb. 1.
“The U.S. economy is very strong and the labor market is very tight, and that suggests the Fed is going to need to lean against the wind,” said William C. Dudley, chief U.S. economist with Goldman Sachs & Co.
Such unpleasantness went entirely unmentioned Tuesday as the president sang the praises of both the Fed chairman and his own administration’s economic record.
Greenspan, said Clinton, “has guided the Federal Reserve with a rare combination of technical expertise, sophisticated analysis and old-fashioned common sense.”
The current expansion will enter its 107th month in February to become the longest one in peacetime in U.S. history, an event over which both Clinton and Gore are virtually certain to exercise serious bragging rights. But both have to be painfully aware of Greenspan’s power to ratify or cloud their claims to key roles.
A new series of Fed rate hikes could cause a painful slowdown just when voters are deciding who might be the best economic steward. Or Greenspan could rain on Gore’s parade by warning about economic troubles ahead--something that some Republican partisans accused him of doing to former President Bush during Bush’s reelection campaign in 1992.
Observers said that even with such worries, there was little that Clinton could do but reappoint Greenspan.
“It’s a smart move, before there is new speculation that would send jitters through the markets,” said Kenneth M. Duberstein, President Reagan’s last White House chief of staff.
“Who else were they going to appoint and get through a Republican-controlled Senate?” asked Roger M. Kubarych, a former Fed senior vice president who is now at the Council on Foreign Relations.
Greenspan, who succeeded Paul Volcker as Fed chairman, has generally maintained strong bipartisan support by managing the nation through a dizzying series of real or potential financial crises.
He had barely been in office two months when the hot stock market crashed in October 1987. He quickly announced that the Fed would make available whatever money was needed to ensure traders could pay their debts, then he orchestrated a series of rate cuts to keep the economy from foundering.
Three years later, when Iraq invaded Kuwait, driving oil prices up sharply, and again in 1998, when the Asian economic crisis jumped to Russia and then Latin America, he persuaded the U.S. central bank to take similar steps, avoiding either deep recessions or destructive financial freeze-ups.
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Times staff writer James Gerstenzang contributed to this report.
