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Federal Reserve : After Greenspan : choosing the next Chairman of the Federal Reserve

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Disciplines
  • Economics
  • Law
  • Political Science

Abstract

After Greenspan: Choosing the Next Chairman of the Federal Reserve When Alan Greenspan’s termends on Jan. 31, 2006, he willhave served as Chairman of the Board of Governors of the Federal Reserve System for 18 years and five months. That is the second-longest tenure in the Fed’s history, just four months shorter than the one served by William McChesney Martin from 1951 to 1970. Greenspan has earned a reputation as a deft handler of monetary policy. His era coincided with several signifi- cant economic shocks, including the stock market crash in 1987, the terrorist attacks on Sept. 11, 2001, recessions in the early 1990s and the early 2000s, and booms in the stock market and now the housing market. His success in navigat- ing those and other pitfalls has helped him gain popularity outside of the usual realm of Fed watchers. All types of media monitor his Congressional testi- mony and various speeches, the likes of which produced now-famous phrases like “irrational exuberance.” Whoever his successor turns out to be will have a difficult act to follow. Markets are now accustomed to the policies that the Greenspan Fed has pursued. There is general confidence that the Fed will keep the economy in good order. At the same time, it is diffi- cult to articulate precisely why the Greenspan Fed has succeeded. The decisionmaking process during the Greenspan era has become more trans- parent over time, but there is still some uncertainty about how the Fed will build on its recent success. Will Greenspan’s successor move more in the direction of rules-based decision- making, such as adopting an inflation target, or maintain the more discre- tionary approach of recent years? The process for choosing a new chair is itself both discretionary and rules-bound. It involves input from the executive and legislative branches of government, similar to the appoint- ment procedure for many other government posts. The Federal Reserve Act (FRA) of 1913, which established the Federal Reserve System, dictates who

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