Greenspan's Unfinished Job

What is Alan Greenspan's legacy? Is he the greatest central banker of all time? How will Benjamin Bernanke's tenure change the Federal Reserve modus operandi?

Amid all of the thoughtful chin-scratching ahead of Tuesday's Federal Open Market Committee meeting, perhaps the most crucial question of all is getting short shrift: What is the likely path of monetary policy?

There seems to be a near-consensus view that the end of Greenspan's 18-year reign at the Fed will roughly coincide with the end of a 19-month long tightening campaign. The market has fully priced in Tuesday's expected 25 basis-point rate hike, which would take the Fed funds rate to 4.50%. But the majority believe one additional rate hike in March -- if even -- will certainly mark the end of the cycle.

Meanwhile, a small contingent, led by bond fund manager Bill Gross, believes the Fed will halt its tightening campaign Tuesday and perhaps cuts rates by the end of the year.

"We here at PIMCO have a viewpoint: short rates will be lower, as the Fed closes the ongoing tightening cycle at the end of this month and commences an easing cycle by the end of this year," Pimco managing director Paul McCulley wrote at the firm's Web site earlier this month.

But the majority view (Pimco heavyweights included) about the extent of tightening has been persistently wrong since early June, when Dallas Fed president Richard Fisher's infamous "eighth inning" comment got folks speculating about the "last" rate hike.

The past six months have reminded Fed watchers that, just like baseball games, monetary policy can go into extra innings. Similarly, the "probably would not be large" phrase in the minutes of the Fed's Dec. 13 meeting guarantees nothing, despite conventional wisdom about the Fed's likely path. It's worth noting the fed fund futures now price in 80% odds of a 4.75% rate by the March 28 Fed meeting -- up from less than 50% a few weeks ago -- and 100% odds of that rate being reached on May 3.

Miles to Go Before They Sleep

There is a rising amount of evidence that the Fed will stay in the game for longer than expected, even if it pauses at some point to gauge the effect of its tightening so far.