Tuesday, September 20, 2005

What Will Greenspan Do?

Here is my best guess.

I think the Fed chairman is above all a politician. And politicians are inclined to be careful when there is a lot of uncertainty about the consequences of possible actions. Morever, good politicians take care to avoid blame for bad outcomes.

With this in mind I predict that the Fed will leave interest rates unchanged today. Why? There is a lot of uncertainty now about the Katrina and Rita effects on the economy. Oil prices have remained high and the last consumer confidence number was very weak. The last thing Greenspan wants is for the Fed to be blamed for a recession. And an interest rate increase in the face of these uncertainties will certainly earn such blame if indeed the economy slides into recession.

So a cautious politician would adopt a " wait and see " attitude at this juncture. This is exactly what I expect Greenspan to do today.

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