Alan Greenspan's Comeback Tour

The Fed's easing campaign was on hold from November 2001 until November 2002, when the Federal Open Market Committee eased by 50 basis points, bringing the fed funds rate to its current 1.25% level. The November 2002 rate cut was soon followed by a now infamous speech by Fed Governor Ben Bernanke, which detailed how the Fed would use "whatever means necessary to prevent significant deflation in the U.S."

While many decried the irresponsibility of Bernanke's "printing press" comments, others took it as a signal from the Fed that "'we're not going to let this thing go down,'" as Bert Dohmen, founder of Dohmen Capital Research in Los Angeles, recalled. "Bernanke rang a bell [and] I think they'll keep it glued together until the elections" in 2004.

Since last November, various Fed officials have become increasingly emboldened in talking about deflation risks. On Tuesday, Greenspan said the Fed will "lean over backwards" to prevent what he described as "corrosive deflation" vs. a less-onerous decline in prices.

Once again, Alan Greenspan got what he wanted. Those comments fueled further gains in stocks, as equity traders took solace knowing the Fed is vigilant against deflation, and lower bond yields, as fixed-income traders surmise the Fed may buy long-dated securities as part of the same effort.

In sum, while many traders wave Greenspan voodoo dolls in public, more are once again genuflecting to him, albeit silently.

Denouement

Longtime readers will recall I've been a critic of Greenspan since long before it was popular. This column doesn't signal a change of heart. However, it's interesting that as Greenspan's "stock" has fallen, his talents as Fed chairman may have never been sharper.

Of course, there are risks to all this, including risks of blind faith in the Fed, even of the unconscious variety. More important, there are risks to the Fed's policies themselves, as we'll discuss in Part 2 of this story.