Greenspan’s final
7 months at Fed may
count the most

NEW YORK » With seven months left in his term, Federal Reserve Chairman Alan Greenspan is trying to win back business confidence, manage interest rate policy and keep a cork on inflation, all with an eye toward the legacy he'll leave his successor.

It's a tricky balancing act, but Wall Street seems confident the avuncular Fed chief of 18 years can pull it off -- and perhaps goose growth in the second half while he's doing it.

It goes without saying that Greenspan will want to make the most of his speaking opportunities during his final months in the job. He's proven himself a remarkable steadying influence on the market; a case in point was the performance of stocks on Thursday. Wall Street got off to a slow start, but ended on a positive note after Greenspan delivered a bullish assessment of the economy to Congress. The fact that he'll stay in office through the end of the year has many analysts feeling upbeat about the rest of 2005.

"This will be a good year in the market. It may not be a great year, but it'll be a good year. Greenspan isn't going to let this fall apart," said Michael Murphy, managing partner at the Piney Run Group in Baltimore. "There's just so much respect for him, no one questions him. He's the guy who moves the market. My concern is going to be for next year, when they try to replace him. You know how the market hates uncertainty."

Investors have been preoccupied with interest rates lately, trying to gauge how much higher they'll go. The Fed has raised rates rate eight times over the past 12 months, and Greenspan hinted to lawmakers that the gradual tightening was likely to continue. The Fed's Open Market Committee is widely expected to raise the federal funds rate by another quarter-point to 3.25 percent at their next meeting, set for June 29-30.

Most market seers believe one of Greenspan's goals is to deliver a neutral monetary policy to whoever replaces him when his term ends Jan. 31, 2006. That probably means a bit more tightening after the June meeting, not less, said Jack Caffrey, equities strategist at J.P. Morgan Private Bank in New York. It's just one of many factors Greenspan will weigh as he navigates this period.

"You don't want to let inflation get out of the bag. ... Hence, making sure we keep a measured pace of reduction in the accommodative monetary policy. Alternatively, you don't want to overtighten and get blamed for the next recession," Caffrey said. "As much as you think after 18 years that you know what you're doing, in some sense, from a legacy perspective, the stakes are a bit higher now. There will be no more chance for a comeback after February of 2006."

There's a good deal of speculation already about who will replace Greenspan, who is 79. The White House will not discuss personnel issues, but several possible successors have been mentioned in financial circles, including Martin Feldstein, 65, an economics professor at Harvard University and president of the National Bureau of Economic Research; R. Glenn Hubbard, 46, dean of Columbia University's graduate school of business and an economics professor; and Ben Bernanke, 51, a member of the Fed board since August 2002 and Bush's pick to become chairman of the Council of Economic Advisers.

Before a new chairman is chosen, Greenspan must tackle an intimidating to-do list, said Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland. Among other things, he probably would like to engineer a reacceleration in growth that doesn't rely so much on consumer spending and borrowing from overseas. That means rekindling domestic business investment, which could go a long way toward boosting overall productivity growth, Morici said.

Greenspan is also looking to get short-term interest rates up to a level that will be make monetary policy a useful tool for his successor; rates need to be high enough that lowering them will be a viable option when recession next threatens. It also would be nice to leave his successor with an environment where the United States isn't overly dependent on foreign debt to fuel consumer spending and power growth.