July 6, 2005
Post-Greenspan Fed will face credibility test-Poole
By Alister Bull
SAN FRANCISCO (Reuters) - Whoever replaces Federal Reserve
Chairman Alan Greenspan when his term ends will face a test of
inflation-fighting credibility as markets weigh future policy,
a top U.S. central banker said on Wednesday.
St. Louis Federal Reserve Bank President William Poole said
markets currently expect a period of low U.S. inflation to
continue well after Greenspan departs office early next year,
but said that confidence would likely weaken somewhat.
"The next chairman will start with a base of
institutionalized market confidence, but the market will
naturally be somewhat skeptical until the new chairman has
established his or her own track record," he said during a
panel discussion on the post-Greenspan Fed.
"The Fed's inflation-fighting credibility may be somewhat
more fragile over the next few years than it has been over the
past few years."
Poole touched on four attributes that have come to
characterize the Fed under Greenspan, who took the helm in
August 1987 and is due to depart at the end of January --
credibility in fighting inflation, successful crisis
management, a depth of understanding on the economy and the
increased predictability of interest-rate policy.
"Alan Greenspan has an astounding command of data," Poole
said. "Greenspan's highly informed intuition has enabled him to
adjust the stance of policy ... in timely fashion."
Nonetheless Poole, who did not address the current economic
situation in his remarks, said Greenspan had "to some degree"
instilled in the Fed his deep command of data. "Nevertheless,
Greenspan's own expertise will be hard to match."
Poole said the Fed had made large strides toward
policymaking transparency under Greenspan, contributing greatly
to the central bank's success and the economy's health.
However, Poole's remarks showed he remains uncomfortable
with the Fed's recently adopted practice of providing forward
guidance on its expected monetary policy path.
He said the "measured pace" language introduced by the
Greenspan Fed to characterize its current monetary tightening
cycle was an example of this untested "significant departure"
that may eventually need to be reassessed.
"Experience to date with forward guidance has been
successful but in my opinion it is too early to tell whether
this departure will be successful in the long run," Poole said.
"The matter will be tested when changed circumstances require
policy action that differs from forward guidance."
As he has in the past, Poole argued that markets should
properly reflect the likely direction of interest-rate policy
as long as they had a thorough understanding of what would
drive the central bank's decisions.
"In the years ahead, maintaining and extending improved
predictability of policy will be a major challenge for Federal
Reserve chairmen," he said.