NCPA - National Center for Policy Analysis

Fed Acted Forcefully

December 12, 2003

It may ultimately be said of Alan Greenspan that he enjoyed his finest hour when the public admired him least. Only a few months ago the shaky economic outlook inspired fears of deflation -- a general decline in prices caused by too much supply (of unemployed workers, unused fiber-optics and lots more) chasing too little demand. Now the U.S. economy is leading a global recovery. Greenspan and the Federal Reserve deserve much -- if not all -- of the credit for this turnaround, says Robert Samuelson.

What Greenspan & Co. may have done is to avoid a colossal blunder. So much was beginning to go wrong with the economy at the end of 2000 -- and the rest of the world was so dependent on the U.S. economy -- that a timid reaction from the Fed might have been fatal.

  • It cut interest rates 11 times in 2001 and once again in 2002 and 2003.
  • The Fed funds rate (on overnight loans between banks) went from 6.5 percent in late 2000 to its present 1 percent, the lowest since 1958.
  • First, the economy's revival also has other causes: big tax cuts, innate American optimism, the ability of U.S. companies to cut costs and improve profits.
  • Second, the revival still faces many threats: the fading effects of tax cuts and lower interest rates (the mortgage-refinancing boom), cautiousness in corporate America, high levels of consumer debt and weak economies in Europe, Japan and Latin America.

Source: Robert J. Samuelson, "Greenspan's Finest Hour?" Washington Post, December 12, 2003.


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