Can Alan Save the Day Again? Probably Not. in the Past Decade, We've Created Inflated Ideas of the Federal Reserve's Power

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These are times of shattered illusions. The attacks of Sept. 11 destroyed our sense of invulnerability, and now the mythology of the "New Economy" is receding before the reality of declining jobs and profits. To this list may soon be added the Federal Reserve's presumed power, which--during the reign of Alan Greenspan as Fed chairman--has grown to immense proportions in the popular imagination. People began thinking that the Fed had achieved what "fine tuning" (a concept discredited in the 1970s) had promised. By well-timed changes in interest rates, the Fed can steer the economy along a path of low inflation, high employment and rapid growth.

It is doubtful whether Greenspan ever bought this line. He has seen too many business cycles to harbor a false sense of control. But the success of his stewardship has inspired unrealistic expectations, even among economists, about …