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Greenspan defends monetary policy
JACKSON HOLE, Wyoming (Reuters) -- Federal Reserve Chairman Alan Greenspan fired back at his critics on Friday, saying he preferred to set policy by managing possible risks rather than by following formal rules, like inflation targets. "Some critics have argued that such an approach to policy is too undisciplined -- judgmental, seemingly discretionary and difficult to explain,'' Greenspan said in a speech to the Kansas City Federal Reserve's exclusive annual conference. Some critics, including Fed Governor Ben Bernanke, have said the Fed should adopt formal policy prescriptions such as inflation targets which many central banks, including the European Central Bank, use to keep prices within set boundaries. But Greenspan has long resisted the idea of inflation targeting, believing a less-explicit approach allows for greater flexibility. His unusually brief address at the conference on Friday appeared a defense against those who thought the Fed overreacted to the threat of falling prices, as well as those who want the central bank to use formal inflation goals. "That any approach along these lines would lead to an improvement in economic performance, however, is highly doubtful,'' Greenspan said of formal rules. He said the U.S. central bank's technique of considering future risks to its economic outlook had shaped its response this year to the threat of a broad fall in consumer prices, or deflation, which forecasts at that time had seen as remote. This spring, several senior Fed officials gave speeches outlining alternative policy tools the central bank could use to combat deflation if it ran out of interest-rate ammunition. This convinced financial markets the Fed was considering such actions as buying bonds, prompting a plunge in long-term interest rates. However, the Fed later made clear that such options were unlikely, triggering a sharp reversal in the bond market and pushing up borrowing costs in such areas as home mortgages. Greenspan said on Friday the desire to deal with risks preemptively ``have inclined Federal Reserve policy-makers toward policies that limit the risk of deflation even though the baseline forecasts from most conventional models would not project such an event.'' The Fed chief used the same forum last year to give a lengthy defense of his handling of the 1990s stock market bubble and subsequent bust. That speech did little to allay criticism of the Fed's reluctance to rein in the boom. Since taking the helm of the Fed in 1987, Greenspan has built a reputation for using finesse rather than formal dictates to govern monetary policy. This served him well during the beginnings of the economic boom in the 1990s. At that time, forecasters were expecting a surge in inflation but the Fed chief held off on raising rates, convinced a new economic force -- productivity growth -- was at work. This was in defiance of another economic rule -- the non-accelerating inflation rate of unemployment, or the jobless rate below which prices were expected to start rising, would have dictated a rise in short-term interest rates. The long-revered Fed chief has been parrying a barrage of criticism since the stock market collapsed, with some newspaper columnists verging on the vitriolic. One of the more flattering arguments critics turn to for using formal rules to shape monetary policy is that it would keep the central bank on a steady course under a new leader. Copyright 2003 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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