Greenspan Legacy Fragile, Policy Predictable

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Author: Martin Lukac

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There is structure to the policy Federal Reserve Chairman Alan Greenspan has practiced during his tenure, announced William Poole, president of the St. Louis Fed on Friday. He went on to say that the practices of the chairman have been "somewhat fragile" as little has been institutionalized.

Economists have widely argued that Greenspan has had the opportunity to set policy, yet has never disclosed his reasoning behind his moves to either the central bank's staff or to the public. But Poole argues that the Greenspan era has been hallmarked by highly predictable moves in the last few years.

"If the market can predict the Fed's policy actions, then it might be the case that the Fed policy follows a rule, or policy regularity of some sort," Poole stated in his speech to the Cato Institute on Friday.

The main key to Greenspan policy seems to be that inflation stability is the primary goal of the policy, with the core personal consumption- expenditure index being used as the measure of price changes.

Greenspan's policy has followed the contours of the so-called Taylor rule. Interest rates are set to keep both inflation and output at desired levels. Poole says that Fed officials often suspend or overlook these rules as they see fit.

Poole adds that Greenspan has always sought consensus among the 19 member Federal Open Market Committee.

It is expected that whoever replaces Greenspan will want to extend his successful era by committing to pursue the same policy rules. Poole says that this leaves him with optimism for the future.