The Fed In Neutral

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What more can he do? Greenspan

The Federal Open Market Committee surprised no one when it duly announced at 2:15 p.m. ET Tuesday that it had left short-term interest rates alone. Everyone from Greenspan on down knows the economy is far from recovered, but it is recovering — which leaves the Fed in the same spot as the rest of us: sitting and waiting to see what happens next.

The boilerplate was fittingly dualistic. "The information that has become available since the last [policy] meeting ... confirms that economic activity has been receiving considerable upward impetus from a marked swing in inventory investment," the Fed said in its statement. "Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain."

In other words, despite the general glumness about the speed and strength of the recovery, particularly among New Economy techies, rates hit bottom in December at 1.75 percent and they're only going one way from here: back up.

But not just yet, though. For this meeting and almost certainly the June 24-25 sit-down that follows it, the Fed is expected to be firmly planted on the bench while Greenspan continues to deliver his best long-term prognoses in non-official speeches and testimony. Yes, the recovery will come along eventually, and yes, it'll be a fine expansion once it gets going. For the next few quarters, though, your guess is as good as his.

Talk about uncertainty. Demand is still in question, thanks to rising unemployment, a cooling housing market and record levels of consumer debt. Supply is even harder to smile about; businesses are still unraveling their own debt and accounting messes, while profits are scant. Want to know what Wall Street thinks of the future? Monday morning, Merrill Lynch reported that a survey of Wall Street strategists found that 69 percent say this is a good time to buy stocks — and told clients to sell, since with that much optimism there was sure to be further disappointment. And by the closing bell, they were already right — NASDAQ (down 35) had plunged through the 1600 level, the Dow (down 190) had erased all of last week's gains, and blue-chips everywhere were hitting new lows.

All of this, of course, worries Alan Greenspan as he comes up on his 15th year in office. He seems likely to step down either when his term is up in summer 2004, or when the next expansion is under way — meaning that the current twist in the business cycle represents the Great One's last turn at bat. And the longer this economic downtime lasts, the farther Greenspan's legacy gets behind in the count.

The critical moment will be when the Fed reluctantly gets back into the game. For now, inflation seems tame enough, and even an outbreak wouldn't be good news of sorts if it were tied to resurgent economic growth. But whenever energy prices are high — and despite taking a brief slide Monday as Iraq ended its month-long oil embargo, they still are — the worst kind of price pressures lurk. Add to that the weak dollar increasing domestic prices in the import-dependent U.S., and it's not too hard to imagine some version of that dreaded 70s economy — growth-less inflation and listless stock prices — playing in re-runs this summer. That could force Greenspan into some very unpopular tightening.

But as long as Europe and Japan are worse off than the U.S., the dollar can only fall so low, and the Fed should be able to spend the rest of 2002 sitting on its hands and waiting for businesses and consumers to get themselves back on track. And there's a certain reassurance to see the Fed in its present bind, unable to cut and unwilling to raise — at least everybody can agree that when it comes to monetary policy, rampant inflation is the only thing left to worry about. That, however won't make it any easier for Greenspan to sit home with his hands tied while his beloved New Economy tries to get back on its feet without him.