Next Fed Head Will Face Credibility Test

Thursday, July 07, 2005

Reuters reports the following remarks from Fed St. Louis president William Poole about the difficult tasks the successor to Federal Reserve chairman Alan Greenspan, who will retire in 209 days, will face.
From the Reuters dispatch:
Whoever replaces Federal Reserve Chairman Alan Greenspan when his term ends will face a test of inflation-fighting credibility as markets weigh future policy.
St. Louis Federal Reserve Bank President William Poole said markets currently expect a period of low US 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.

See also this post "AP Boils Down Greenspan Succession to 3 Names"


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