Greenspan's guiding hand Power: Fed Chairman Alan Greenspan wields tremendous influence over capital markets and maintains vigilance over global economic conditions.

Economy

September 09, 1998|By William Patalon III | William Patalon III,SUN STAFF

When it comes to the world's capital markets, Federal Reserve Chairman Alan Greenspan has the amiable demeanor of Clark Kent and the power of a Superman -- though unlike the comic-book hero he seems impervious to the Kryptonite powers of economic and political pressure.

Many Fed watchers say that it was the mere hint of lower interest rates -- in a speech given by Greenspan Friday night at the University of California, Berkeley -- that sparked yesterday's 380.53-point jump in the Dow Jones industrial average. The rise was the single-biggest point gain ever in the Dow and, for yesterday at least, Greenspan's intimation of lower interest rates restored calm and confidence to a stock market that's lately been whipsawed in daily volatility and rocked by steep plunges.

"As far as the financial markets go, he's more powerful than God," said Rob Brown, chief market strategist for Ferris, Baker Watts Inc. in Baltimore. "He controls interest rates. Interest rates control the money flow. And money makes the market go."

In the capital markets, there are many influencers and opinion leaders. There's Abby Joseph Cohen, the chief market strategist for Goldman, Sachs & Co., whose bullish -- and usually accurate -- pronouncements about the market's direction have sent shares climbing on days she issues her forecasts.

There's also Prudential Securities Inc. market strategist Ralph J. Acampora, whose surprisingly bearish turn in early August helped send the Dow down 299 points.

And there's Merrill Lynch Global Securities analyst Thomas P. Kurlak, the once-bullish guru on Intel Corp., whose more recent gloomy view of the big computer-chip company's prospects has helped push the shares down about $20 from their high near $100.

In each case, however, those opinion-makers have limited spheres of influence. They can pontificate, but Greenspan can act: He controls the purse strings of the nation's central bank. Lower interest rates are good for stocks. When stocks rise, consumers are more confident to spend. And since consumer spending accounts for about two-thirds of the nation's $8 trillion economy, higher stock prices are good for the economy.

In addition, with the economies of other countries crumbling, it's Greenspan's Fed that is seen as the bank of last resort -- the last hope for keeping the global malaise from swamping the U.S. stock market -- and, thus, the U.S. economy.

"The Fed is one of the global institutions that continues to have enormous credibility," said Maureen Allyn, chief economist for Scudder, Stevens & Clark Inc. in New York City. "Certainly the interpretation was that he is indeed on top of what's going on -- and that he will be taking steps to make sure the U.S. economy keeps going. There was a huge sigh of relief on that."

Clearly, the Fed also has enormous power, in effect acting as another branch of government, which has at times caused consternation in Congress and the White House.

In the wrong hands, all that power could be deadly, especially in today's tightly interconnected global market, where it's no longer enough just to consider the economic outlook of the United States alone, excluding all the other markets. But economists and investment analysts say the country has been blessed to have had two excellent Fed chairmen in a row: Paul Volcker, who served from 1979 to 1987 and is credited with crushing inflation by raising interest rates above 20 percent; and Greenspan, who, since 1987, has kept inflation in check and managed interest rates deftly enough to nurture two of the longest peacetime economic expansions the nation has ever seen.

Importantly, Greenspan has done so while maintaining vigilance over global economic conditions. "I think he's one of the most powerful men out there -- even more powerful, I have to say, than the president," said Deborah Voso, a certified financial planner for Voso Associates in Frederick.

Market watchers say Greenspan has the right stuff. Indeed, because of his Friday night speech, observers believe Greenspan's Fed will likely lower the federal funds rate, the most precise indicator of the direction of interest rates. Because of Greenspan's continued concern about the return of inflation, the federal funds rate has been at 5.5 percent for about a year, and some investment analysts say that it's kept interest rates at an artificially high level. Lowering interest rates should keep the U.S. economy humming, while helping to bail out economies such as those in Asia.

An example of how the Fed's power can be used correctly was Greenspan's post-speech Friday night dinner meeting in San Francisco with U.S. Treasury Secretary Robert E. Rubin and Japan's new finance minister, Kiichi Miyazawa. Published reports say that Greenspan and Rubin officials had little success trying to impress upon Miyazawa the need for Japan to fix its banking system and jump-start its economy.

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