What next for the Fed?

Alan Greenspan has served under four presidents

By BBC News Online's North America Business Reporter, David Schepp

In the coming years, President George W Bush will have the opportunity to fashion the US central bank in an image that more reflects his administration, especially given that four of the seven governors on its board will have retired or quit by 2004.

Currently, there are two vacant seats and a third vacancy soon to occur on the board of governors of the Federal Reserve.

Critics charge that more than dollar bills need updating at the Fed

Then there is the question of the ageing chairman, Alan Greenspan, who likely will not pursue another term.

President Bush, who is responsible for filling the vacant seats on the Federal Reserve's board of governors, can hasten change at the conservative agency that critics say is behind the times.

But the question is, will he?

Appointing someone as popular and revered as Mr Greenspan will be a tough act to follow for Mr Bush.

After all, Mr Greenspan is the first Fed chairman to achieve pop-cult status.

His very words can roil (or sooth) markets from New York to Tokyo.

Greenspan's legacy

Mr Greenspan is now on his fourth appointment, having first been named chairman by President Reagan in 1987.

Subsequently, he was renamed to the post by President George H W Bush and twice by Bill Clinton.

By the time his current term expires in 2004, Mr Greenspan will be nearly 80 years of age.

Larry Lindsey is President Bush's point man on the economy.

But there is no indication that he will likely leave his post early.

"I would doubt that he's going to retire before his term is up," says former Fed governor Lyle Gramley, now consulting economist at the Mortgage Bankers Association of America.

"This man is still enjoying very good health. He's mentally very, very sharp - he has not lost any of his mental acuity. He loves his job."

That would make Mr Greenspan the longest serving chairman in the history of the Fed since its creation by US lawmakers in 1913.

Currently, Mr Greenspan is tied with William Martin, who served as Fed chairman under Presidents Eisenhower, Kennedy and Johnson, in serving 14 years on the job.

An A-plus job

And his stewardship of the nation's economy has been lauded not just by members of the economics community but by lawmakers in Washington as well as former President Clinton and the current President Bush.

[Mr Greenspan] was the first in the Federal Reserve - indeed among the first in the entire economy - to realise that something quite remarkable was happening to productivity

former Fed governor Lyle Gramley

"How could you give him anything less than A-plus, given what has happened to the economy," says Mr Gramley.

What happened, among other things, were strong gains in productivity among American workers in the late 1990s, largely credited to advances in technology that allowed workers to do more, more quickly.

Those advances helped push the US gross domestic product higher while inflation remained relatively tame.

"[Mr Greenspan] was the first in the Federal Reserve - indeed among the first in the entire economy - to realise that something quite remarkable was happening to productivity.

Therefore, monetary policy had to accommodate that."

Detractors speak out

But Mr Greenspan and his Federal Reserve have their detractors.

Analysts have been critical of the Fed's decision a year ago to hike interest rates.

It is a decision Michael Holland, chairman of Holland & Co, says has brought the country to the brink of recession.

Indeed the over-tightening of monetary policy has led to two surprise moves by the Federal Reserve to cut interest rates in order to spur consumer spending.

Electronic payments

Martin Mayer, a guest scholar at the Brookings Institution who has recently written a book about the US central bank, titled "The Fed", says the US central bank has a long way to go in terms of modernisation and transparency in its decisions.

He argues, for example, that the Fed has been creakingly slow in adopting electronic payments, a practice most of Europe has enjoyed for many years now.

Instead of writing a cheque and waiting for it to make its way through the postal system to the payee, consumers can simply have a designated amount deducted electronically from their bank accounts.

It is a system that even in limited use in the US has reduced transaction costs considerably.

For example, insurance companies are able to let customers make instalment payments on insurance policies without a fee where previously there was one.

But the Fed has moved slowly in adopting a system to simply electronic payments, Mr Mayer says.

Protecting jobs

Among other things the Fed is an employer, he says, and with hundreds if not thousands of employees around the nation employed to facilitate cheque clearing, the Fed is loathe to adopt a form of electronic transactions that would eliminate those jobs.

"Half of the people who work for the Federal Reserve system work processing cheques," Mr Mayer says.

"Therefore, we will come last in the civilised world, in moving to electronic payments because the Fed resists it tooth and nail at every turn."

Tough act to follow

Mr Mayer also says that most people do not realise that much of the Fed's efforts are focused on processing payments, and mergers and acquisitions - not on monetary policy.

The resistance to adopting electronic payments is emblematic in Mr Mayer's view of the hurdles the Fed must face going in to the future.

With three years still left in his term, Mr Greenspan is not likely to impose great changes on the agency, which remains largely as it was fashioned by Congress nearly a hundred years ago.

Mr Greenspan may be a tough act to follow.

However, the greater challenge may be in finding someone who cannot only fill his shoes but who also explores a different direction in which to walk.