Greenspan's time may be up

WHEN Alan Greenspan appears before the US Congress today and lawmakers ask 'is it almost over?' they may well be referring not to America's economic recession but to the Federal Reserve chairman's exalted reign as the world's top economic policymaker.

Investors will be listening intently for two things critical to global prospects; whether the Fed chief will officially declare the US recession finished and whether he will publicly address speculation that he is considering retirement.

Financial markets have been rife with rumours that Greenspan, who is 76 next month, will use the lull in the economy - a time when momentum is growing and no crises loom - to exit the Federal Reserve, where he has toiled since 1987.

The speculation has reached such proportions that a senior Bush Administration official believed to be one of those in line for Greenspan's job recently tried to quell the hysteria. Bush's chief economic adviser, Lawrence Lindsey, said he did not believe Greenspan had 'any intention of going anywhere'.

Lawmakers want more than Lindsey's assurance, however, and Greenspan will be grilled about his plans when he delivers the first of two monetary policy reports to Congress. The big issue is one of timing. With his advancing age, he is thought to be unlikely to seek another four-year term in 2004, when his current term expires, but appointing a new Fed chairman in an election year is fraught with political consequences.

Congress does not like to make major appointments in a Presidential election year. Many economists close to Greenspan believe he will retire late this year or early next to avoid the political complications. 'His is a difficult job that takes up an incredible amount of time and uses a lot of intellectual and emotional energy,' said Lyle Gramley, a former Fed governor. 'If he is not planning to seek another term, early next year would be the ideal time to bow out.'

One reason for an early exit is that most economists believe the US economy will be in good shape by later this year, growing nicely with little inflation, barring another shock such as 11 September. In his testimony, economists expect Greenspan to offer a mixed assessment of future prospects. While the economy is clearly turning, he is unlikely to declare that monetary policy will move from an easing position to one of tightening.

Although the Fed has not cut interest rates since the end of last year, policy is still considered expansive as the Fed funds rate, the key monetary lever, is at its lowest in 40 years while measures of money supply show ample liquidity in the system. The liquidity is necessary until the Fed sees signs that banks are shedding their reluctance to lend to business borrowers, a situation some economists believe borders on a credit crunch.

The Fed is unlikely to shift to a tighter policy stance until real-time reports from businesses and industry groups improve. 'A torrent of better-than-expected macroeconomic news makes it abundantly clear that recovery has begun,' said Morgan Stanley chief economist Richard Berner. 'In contrast, many industry analysts and companies report little, if any, sign of a turnaround.'

There are encouraging signs, including productivity, which grew at about a 2.5% annual rate in the last three quarters, unusual for a recession, when productivity usually weakens. Economists believe that the healthy productivity performance has laid the groundwork for an inflation-free recovery, although there are still lingering questions about how robust the expansion will be.