From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Sat Aug 30 2003 - 13:28:52 EDT
For those now theorizing the rules and constraints on central banks... rb Greenspan Argues Against Strict Rules for Fed August 30, 2003 By EDMUND L. ANDREWS JACKSON HOLE, Wyo., Aug. 29 - Fending off critics who say the nation's monetary policy has become too personalized and idiosyncratic, Alan Greenspan, the chairman of the Federal Reserve, stepped up his insistence today that the Fed should continue to have broad discretion and not be hemmed in by formal rules or even by long-established traditions. "Some critics have argued that such an approach to policy is too undisciplined, judgmental, seemingly discretionary and difficult to explain," Mr. Greenspan told a symposium here attended by Fed officials and monetary policy experts from around the world. "The Federal Reserve should, some conclude, attempt to be more formal in its operations by tying its actions solely to the prescriptions of a formal policy rule," he continued. "That any approach along these lines would lead to an improvement in economic performance, however, is highly doubtful." Mr. Greenspan, who has come under unusually heavy criticism on several fronts in the last few months, appeared to be taking aim at several groups in his remarks. One group was clearly the growing number of policy experts, as well as some members of Congress, who have argued that the Federal Reserve should adopt a formal target for inflation that would serve as a basic anchor for decisions and make it easier for investors to understand Fed policy. The Fed chairman has repeatedly opposed any formal reliance on inflation targets, essentially arguing that the world economy is too complex and uncertain for simple policy prescriptions. "Rules by their nature are simple," he said. "They cannot substitute for risk-management paradigms." But Mr. Greenspan also appeared to be making a broader point. Not only should the Fed remain unconstrained by formal policy rules, he suggested, it should not automatically follow the informal rules that often seem to guide policy decisions. The most familiar of these informal rules, which are like formulas that help predict Fed policy, is the so-called Taylor Rule that ties decisions on interest rates to underlying trends in economic output, unemployment and inflation. Mr. Greenspan has long been celebrated for making bold decisions that seemed intuitive, at least from the outside, and that appeared to conflict with traditional policy prescriptions. The most important was his conviction in the mid-1990's that American productivity was climbing much faster than official statistics indicated and that, therefore, the Fed could allow the economy to grow faster than usual without aggravating inflation. Most experts praise that judgment as not only correct but as one of the main reasons for the economic boom that lasted until three years ago. Since then, Mr. Greenspan has tried to fight a recession and subsequent sluggish growth by driving interest rates down to their lowest level in four decades. But critics have argued that Fed policy is too dependent on the instincts of the chairman and that it needs to be anchored in principles that can reliably guide policy after he has retired. Mr. Greenspan is 77 and his term as chairman ends next year. President Bush has said he wanted to nominate him for another term, and Mr. Greenspan has said he would accept the invitation. In speaking out against formal rules for Fed decision-making, Mr. Greenspan said the world economy was so complex that policymakers could not assume that the economy would behave in the way that standard economic models predict. As a result, he said, policy makers have to manage risks by sometimes taking action based on the relatively small possibility that something very important and unexpected will happen. Thus, the Fed reduced the overnight Federal funds rate to just 1 percent, and signaled that it would keep it there until well into next year, because it wanted to have what Mr. Greenspan has called "insurance" against a downward spiral into declining prices or another recession. http://www.nytimes.com/2003/08/30/business/30FED.html?ex=1063264283&ei=1&en=b38f2889ac0255a5 Copyright 2003 The New York Times Company
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