Uncertainty is now gripping the US as demonstrated by the Fed chairman's recent unwillingness to provide a long-term balance of risks assessment
Alan Greenspan knows enough about the future of the US economy to instruct Congress not to enact more fiscal stimulus.
He knows enough about the tightness of the oil markets to tell industrialised nations not to release oil from their strategic petroleum reserves.
But when it comes to the Federal Reserve's self-designated job of providing the public with an assessment of the longer-term balance of risks to the economy, all Greenspan could do was shrug.
The Fed surprised the market not with what it did (it left the overnight interbank rate unchanged at 1.25%), and not with what it said, but with what it did not say.
Because of the 'unusually large uncertainties clouding the geopolitical situation in the short run and their apparent effects on economic decision making, the committee does not believe it can usefully characterise the current balance of risks with respect to the prospects for its long-run goals of price stability and sustainable economic growth,'' the Fed said in a statement following the 23 March meeting. 'Rather, the committee decided to refrain from making that determination until some of those uncertainties abate.''
This was a first. It says something (I am not sure what) when the Fed demurs when previously it has been so willing to manipulate the balance-of-risks statement for its own ends, such as to manage expectations.
This was also a second for the Fed. For the second meeting in a row, the Fed cited the views of analysts, as if to fortify its own forecasts.
'The committee believes that as those (geopolitical) uncertainties lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to economic activity sufficient to engender an improving economic climate over time,'' the Fed said. What are we paying the Fed for? To read the press, peruse Wall Street research, and give us some kind of consensus view?
The reaction from Wall Street economists was swift and sharp, and actually funny.
'We found out that they have no idea where the economy is heading,'' said Ethan Harris, chief economist at Lehman Brothers Inc. 'In the old days, they had three choices for their bias statement: easing, tightening, or neutral. They have added a fourth one: none of the above.''
The Fed abandoned the inter-meeting directive in favour of a balance-of-risks statement in February 2000 in an attempt to wean the market from its short-term focus. Policymakers were more interested in conveying their long-term outlook than providing the markets with a short-term trading incentive.
Given the Fed's own goals and guidelines, why not say that while the war with Iraq is clouding the near-term outlook, the longer-term fundamentals look sound? Is that not what the Fed chairman has been telling us for six months in his testimonies and speeches?
'I guess you could say that the uncertainty impacting the economy is also affecting the Fed,'' said Joe Carson, an economist at Alliance Capital Management.
The 'heightened surveillance'' mentioned in the final sentence of the Fed statement is the boilerplate used to suggest the possibility of an inter-meeting move if those geopolitical uncertainties don't resolve themselves in a way that is beneficial for the economy.
'We all know what it means, so why write it in code?'' asked Chris Low, chief economist at First Tennessee Capital Markets. 'It sounds like they are sending a secret message to a Baghdad operative or something.''
Do not joke. The Political Capital column in the Wall Street Journal suggests Greenspan is broadening his scope to include strategic planning. Because oil prices are such an important consideration for the US economy, 'President Bush's economic advisers, including Federal Reserve Board Chairman Alan Greenspan, are telling him US troops need to move quickly to secure Iraq's oil fields when war begins,'' columnist Alan Murray wrote.
Watch out General Tommy Franks. Alan Greenspan has your job in his sights.
Bloomberg newsroom, New York
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