For Now, Fed Stays the Course

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Federal Reserve Chairman Alan Greenspan

Alan Greenspan figures he's right on schedule. Tuesday, at the customary 2:15 p.m. in the East, the Fed stayed in line with expectations and officially took its eye off inflation, leaving interest rates alone but restoring its bias — the only sanctioned statement of what the Fed's own expectations are — to neutral. The Fed's explanation: "While some inflation risks persist, they are diminished by the more moderate pace of economic activity."

Yes, the economy is slowing down. Consumer confidence is fading fast, along with PC sales, auto sales, manufacturing output, factory orders, orders for durable goods, incomes, retail sales — and portfolios. Wealth effect? With a week of sessions left in the trading year, NASDAQ is down 35 percent for the year, the Dow maybe 7 percent. This, remember, was the year the bubble burst for a nation of insta-millionaire dreamers.

Not everything's dropping, of course. Inventory levels are rising. So is unemployment. But that was all part of the Greenspan Plan. The soft landing, a gradual slowing of growth and loosening of the labor markets that was supposed to keep those hounds of inflation at bay. Bring the economic jetliner down to sustainable levels, nice and easy.

But as the descent starts to steepen, some of the passengers are starting to scream (including a few Fed governors, according to Monday's Wall Street Journal). Last week, Sen. Byron Dorgan (D-N.D.) implored the Fed to cut rates and avoid a recession before it was "too late." And a sizable minority of Wall Street went into Tuesday thinking Greenspan should have cut rates by a quarter-point, as a Christmas gift to the markets and as an acknowledgment that he's on the job.

The Dow might well have hopped at that; as it is, Fed funds futures — the Greenspan casino — went into the meeting with a small bet on the cut, and the bias-only move is likely to eat up Monday's 200-point rally by week's end. The NASDAQ, meanwhile, will continue to mutter about its own issues, wondering only incidentally if the tech sector will prop the rest of the economy up or drag it even further down.

The business cycle tends to feed off itself, and slowdowns have a way of slingshotting into recessions. Which is Greenspan's job, to smooth out the bumps, and after eight years of economic good times his status as a pilot is legendary. He never claimed to be able to beat the cycle, even after he became a New Economy convert — he'd just rather it bounced between 7 percent and 3 percent annual GDP growth, instead of something on both sides of zero.

Greenspan already saved the world once in the fall of 1997, swooping in with rapid-fire cuts when the ruble imploded and Long Term Capital fell. He figured he was saving us again in 1999, this time from wage-induced inflation, with six rate hikes that ended with a half-point flourish in June 2000. And since he's been on a soft landing of his own, leaving rates alone while slowly climbing down from his inflation-watching perch.

But inflation is so last year. Clinton and Gore, Rubin and Summers, are all leaving. Tech's impregnability is a fading memory. Consumer spending kept us going when the rest of the world was tumbling, and now wallets are closing across the country. President-elect George W. Bush finds that gloom and doom suits him when he's itching for a tax cut, and now the pressure's on Greenspan to get us back on track by spring. If this thing turns into a recession, and he's judged to have been prideful and ignored the warnings when the New Economy needed a little help, his chances of canonization may be shot.

Then again, reports of Greenspan's fallibility have consistently been exaggerated.