NYTimes.com Article: Greenspan Argues Against Strict Rules for Fed

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...

Greenspan Argues Against Strict Rules for Fed

August 30, 2003

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

"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

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

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.


Copyright 2003 The New York Times Company

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