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S. Balakrishnan

THE right man for the right times. Mr Alan Greenspan, the Chairman of the US Federal Reserve, was in his element at the annual gathering of central bankers (present and ex), policy makers and economists at Jackson Hole.

Over the years, for central bankers, it has become the place to be seen in and rub shoulders with the "not-necessarily rich but oh-so-powerful", as one commentator puts it. On the whole, they are not, it appears, as well-paid a lot compared to bank and corporate chieftains. (Among the highest paid is the head of Hong Kong's central bank, but, ironically, as The Economist says, he has little work — given its currency peg, Hong Kong's interest rates are set by the US Fed).

The title of Greenspan's presentation was "Monetary Policy and Uncertainty: Adapting to a Changing Economy." He stirred a hornet's nest in the gathering by rejecting the use of inflation targets to determine or decide monetary policy and interest rates. The US economy, at least, is "too complex to use rule-based models." Judgment is essential to assess the balance of risks at any given time.

In enunciating this view, Mr Greenspan was implicitly disagreeing with many leading central banks in the world, notably the ECB, Bank of England and the Reserve Bank of Australia. Some of his own colleagues, for example, the high profile, Mr Ben Bernanke, have proposed that the Fed must adopt inflation goals to guide policy.

Mr Greenspan also took the opportunity to reinforce his stance that hiking interest rates enough to kill asset bubbles might amount to throwing the baby out with the bathwater. The Fed's doubling of interest rates from 3 per cent to 6.5 per cent starting 1994 had little effect on stock prices. A sharp rise only to puncture stocks might have unintended and serious effects on the economy and that surely is the last thing anyone wants.

Mr Greenspan has left little doubt that he will be an interest rate dove for quite some time to come. In his perception, the US economy can accommodate soft rates for an extended period of time without sparking inflation.

He has a challenge on his hands in the months ahead. Growth estimates have been revised sharply upwards to 5 per cent levels in the third and fourth quarters. Mr Greenspan may face pressure to raise rates for fear of an accelerating economy arousing inflation.

He is unlikely to give in. Indeed his Jackson Hole speech gives the impression that he will countenance some inflation without being panicked into hardening interest rates immediately.

In distancing himself from conventional and orthodox approaches, Mr Greenspan is embarking on a radical redefinition of the role of a central bank and monetary policy. He has the intellectual capacity and application to pull it off.

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