Byline: Robert J. Samuelson
It's Alan Greenspan's swan song. The Federal Reserve raised interest rates last week, as expected. The overnight Fed funds rate went from 1 percent, the lowest since the late 1950s, to 1.25 percent. Over the next year or two, most economists expect the Fed to continue increasing rates; the idea is to contain inflation without smothering the economic recovery. This seems to be Greenspan's last big move on the nation's money and credit markets. His term at the Fed ends in January 2006, and present law bars reappointment. If this final maneuver succeeds, it could secure a dazzling record.
Look back. He arrived in 1987 after Paul Volcker had drubbed double-digit inflation. Under Greenspan, the Fed has faced many problems: the stock-market crash of 1987; weak banks in the early 1990s; the 1997-98 Asian financial crisis; the stock- market and tech bubbles of the late 1990s; the aftermath of September 11. But there have been no calamities. Historically, the two recessions (1990-91 and 2001) were mild. Inflation has declined--from 4.4 percent in 1987 to 1.9 percent in 2003--and incomes have risen. From 1987 to 2003, GDP (gross domestic product) increased by 61 percent and the number of jobs by 25 million.
He's made it look easy. Compared with earlier threats, the present challenge seems tame. For three years, the Fed has aggressively combated a weak economy with cheap credit. The Fed funds rate has been below 2 percent since late 2001 and was at 1 percent since June 2003. Now the recovery seems firm. In the past year GDP growth has averaged 4.8 percent. Job growth has resumed. On the other hand, unemployment remains high enough to mute pressures for big wage gains, which--being the largest cost for business--might spill over into higher prices. The economy seems strong enough to tolerate higher interest rates and weak enough to permit rates to rise slowly (at a "measured" pace, says the Fed).
But appearances may deceive. We now have a new book that provides a glimpse of Greenspan's Fed. It's much messier than advertised. Nominated by President Clinton, Laurence Meyer served as one of the Fed's seven governors from 1996 to 2002. Before that, he taught economics at Washington University in St. Louis and ran a well-known forecasting firm. His book ("A Term at the Fed") isn't a kiss-and-tell tale; it focuses on economic issues. Still, it offers fascinating insights.
By Meyer's account, Greenspan and the Fed often fly by the seats of their pants. Despite a staff of 220 economists, armed with computer models, the Fed …