The Federal Reserve has also been branded as Greenspan. It is believed that the Fed will continue Greenspan's policy in the next few years.
In the past 17 years, the changes that Greenspan brought to the Fed mainly focused on the following aspects:
First, the Fed's interest rate policy has increased information transparency. In the past, the adjustment of the national benchmark interest rate by the Federal Reserve was not transparent enough, which led to the failure of financial market participants to form rational expectations of interest rate trends, which also limited the regulatory role of the federal interest rate in economic operation. Now, the Fed will quickly announce the change of the federal funds rate and explain the monetary policy, which makes the Fed's benchmark interest rate really an effective tool of monetary policy.
Second, it strengthens the Fed's support for the free market. Greenspan changed the basic assumptions of Keynes's monetary policy theory. In Greenspan's view, the free market is the most ideal place to implement monetary policy correctly.
Third, the successful application of interest rate policy tools has changed the traditional macroeconomic model. As an intermediate monetary policy, the federal benchmark interest rate has achieved remarkable results in the United States. It changed the traditional pattern of macro-economy accompanied by high economic growth and high inflation, which led to the phenomenon of high growth and low inflation in the United States in the 1990s.
Fourth, the federal benchmark interest rate has become the core variable in the global financial market. Prior to this, the interest rate in the London interbank lending market had a more important impact on the international financial market.
In Greenspan's era, the core change of the Fed is that the role of the federal benchmark interest rate tool has changed greatly. There are two typical manifestations of this change in real life: First, in the mid-1990s, the interest rates of Southeast Asian countries were not adjusted in time for the interest rates of the United States, which led to the arbitrage activities of international hot money through the foreign exchange market and eventually led to the financial crisis. Another example is 1998. The American Long-term Capital Investment Company misjudged the trend of the Fed's benchmark interest rate, which led to the wrong investment decision. Thus, the impact of changes in the Fed's benchmark interest rate on the world economy can be seen.
Why did Greenspan create a legend?
During his 17 years in power, Greenspan changed the tool of American monetary policy, making the federal funds rate an indicator linking the market and policy, creating a century legend. The author believes that this change also has certain preconditions.
First of all, from the perspective of the theoretical development of economics, before Greenspan became the chairman of the Federal Reserve, there was a consistent understanding of the role of macroeconomic theory in regulating the money supply, that is, under the premise of an efficient market, it was increasingly difficult for monetary authorities to control the amount of money. Therefore, the intermediate goal of changing monetary policy is actually the understanding of American economists after the 1980s. The key to translating this knowledge into the practice of the Federal Reserve in the 1990s is not the change of the chairman of the Federal Reserve, but the adjustment of financial liberalization in the US financial sector in the 1990s.
Secondly, apart from the special status of the US dollar, the reason why the Fed's monetary policy can become the baton of the global financial market is because the United States, as a global economic center country, is experiencing a technological revolution in the IT industry. The economic growth of the United States promoted by this technological revolution has accumulated a large number of global resources in the United States and greatly improved the internationalization of the US financial market in the past decade.
Third, the development of post-war economic globalization has further strengthened the status of the United States as a central country, making the US dollar and its interest rate a carrier and tool to link financial markets in various countries, which is also an important reason for the internationalization of the Greenspan effect.
Continue the legend or inherit the "wand"
For Greenspan's imminent retirement, people on Wall Street seem to be both sorry and nostalgic. Therefore, they are also ambivalent about the candidates for the chairmanship of the Federal Reserve.
The author believes that from the perspective of continuing the effective monetary policy of the Federal Reserve, future successors must realize that the current American economy and the world economic situation have undergone tremendous changes compared with the Greenspan era. Although the adjustment of the American financial system is the most successful case in the world, the role of the market will have different performances in different economic cycles. More importantly, the end of the "new economy" era in the United States and the slowdown of economic globalization have made the structural problems after the rapid economic growth in the United States appear: the increase of huge trade deficit and fiscal deficit will affect the adjustment function of the existing market system. The chairman of the Federal Reserve must readjust the Fed's monetary policy according to the needs of internal and external balance in the United States. In this sense, martin feldstein, who has a deep economic background, may be a better candidate.
However, judging from the consistent characteristics of the Bush administration, a "salesman" with a background of American neoconservative policies may be more important than an economic background. This has been fully reflected in the candidate for president of the World Bank recommended by the US government. According to this idea, the future chairman of the Federal Reserve may come from a candidate who is familiar with Wall Street business and White House politics.
But no matter who will win in the end, the author believes that simply inheriting the "magic wand" model of interest rate tools can only be the psychological expectation of those conservative Americans, and it is impossible to become the realistic model of the future American economy.