By Martin Wolk Executive business editor
updated 2/15/2005 6:40:09 PM ET 2005-02-15T23:40:09

With less than a year left in his term as Federal Reserve chief, is Alan Greenspan thinking about an exit strategy?

Major Market Indices

Investors, taxpayers and lawmakers will be looking for any hint of one when Greenspan troops to Capitol Hill Wednesday and Thursday to offer his semiannual report on the economy.

With the economy expanding steadily, Greenspan has little reason to veer from the Fed’s program of gradually raising short-term rates to prevent inflation from gaining ground. But analysts said they will be looking for any hint of milestones that would allow the central bank to move to the sidelines.

Greenspan also is certain to face questions about his views on overhauling Social Security, the No. 1 item on President Bush's domestic agenda. Several analysts said they thought Greenspan would tread lightly after the kerfuffle over his suggestion last year that benefits eventually might have to be cut.

But one key senator said Tuesday that Greenspan is taking an active role in the debate. Sen. Lindsey Graham, R-S.C., who is writing a bill that would include private accounts to partly replace Social Security, said the Fed chief suggested a new way to calculate retirement benefits.

Lindsey said he met twice with Greenspan, who suggested protecting benefits for low-income workers, say those making $30,000 or less. But higher-income workers would be subject to a new form of inflation indexing that would cut their benefits over the long run.

"He’s a real smart guy," Graham said of Greenspan. "He’s been involved with entitlement reform ideas for years. ... He knows how my bill works because I explained it to him, and he said, ‘Why don’t you look at a progressive indexing system?’ And I think it’s a very good idea.”  

Although Graham is a key player in the Social Security debate, he is not on the Senate Banking Committee that will hear from Greenspan Wednesday. Greenspan will appear before the House Financial Services Committee Thursday.

Greenspan was chairman of a panel in the early 1980s that helped convince Congress to raise payroll taxes and cut benefits by hiking the age at which retirees qualify for full Social Security payments. After his remarks before Congress sparked outrage last year he denied urging benefit cuts and said he was merely repeating some of his longstanding reform proposals.

Investors also will be watching for any hint into milestones that either would send central bankers to the sidelines or lead them to accelerate their rate-hike moves. The Fed has raised short-term rates six times over the past eight months, and most analysts expect more rate hikes this year.

Several analysts noted that Greenspan is due to step down from the Fed early in 2006 and probably is thinking about an “exit strategy” that would leave a stable environment for his successor.

“I think right now the chairman is in a very good position to give us some specifics,” said John Silvia, chief economist at Wachovia Corp. “It doesn’t require him to make a change in policy, just to give us some guidance.”

Analysts are divided on whether Greenspan is likely to sound a “hawkish” tone, indicating the clear need for more rate hikes, or strike a more “dovish” note implying that  the Fed might find reason to take a break from the rate-hike run.

Economists who believe that Greenspan will stress the need for more rate hikes point out that the economy is humming along nicely, and financial conditions are in some respects even “easier” than they were when the Fed began hiking short-term rates June 30 in an effort to rein in growth and keep a lid on inflation.

“It’s an easy bet to conclude that the Fed probably would like to avoid a further decline in market interest rates,” said Tony Crescenzi. “His task his going to be to tell the markets the Fed means business on inflation.”

He points out that since the Fed began its rate-hike campaign, other financial conditions have been moving in a direction that would stimulate the economy — the opposite of what Greenspan intends. Stock values are up nearly 10 percent, long-term mortgage rates have fallen more than a half-percentage point and the dollar has weakened  by more then 5 percent against the euro.

But Kathleen Bostjancic, senior economist at Merrill Lynch, said the declining long-term interest rates reflect market expectations that the economy is slowing, in line with the Fed’s hopes. She pointed out that employment reports from the past three months showing lackluster growth of less than 150,000 jobs a month “are not pointing to robust growth.”

She expects the Fed to continue raising short-term rates a quarter-point every meeting through June, which would bring the benchmark federal funds rate to 3.75 percent, compared with 1 percent in June 2004.

But because the market already expects all those rate hikes, “the risk is that Greenspan does suggest they are closer to being done or that it is not a given that they will go in  each of the next three meetings.”'s Tom Curry contributed to this report.


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