Greenspan to Walk Tightrope

Haste still pays haste, and leisure answers leisure; Like doth quit like, and measure still for measure. --
Shakespeare's Measure for Measure

Time is running out on Alan Greenspan, the long-serving chairman of the Federal Reserve. Expected to retire in just under a year when his term to the Fed's Board of Governors runs out, the maestro's legacy, if he departed today, would be one of responsible stewardship of monetary policy and of a chairman who helped the economy weather a series of crises without a major crash.

But there's still one challenge left for Greenspan -- orchestrating the unwinding of the massive stimulus put in place after the Internet bubble popped and terrorists attacked on 9/11. Having kept inflation-adjusted, or real, short-term interest rates in negative territory for more than three years, the chairman and his colleagues are now moving to bring rates back to normalcy as soon as possible.

Whether they can do so without igniting a crisis in any of the pockets of speculation and "excessive risk taking" they have created, brings to mind William Shakespeare's line that haste still pays haste. Or in this case, perhaps, leverage still pays leverage and the carry trade answers the carry trade.

Still, at least so far, the task is going smoothly. At each of six consecutive meetings, the Fed's Open Market Committee has raised rates by 25 basis points to bring the fed funds rate up to 2.5%, from 1% last spring. And the economy has continued to expand, labor markets have improved somewhat and inflation has remained tame.

All of that has helped form a vast consensus that the Fed can, in its own words, remove its accommodative policy "at a pace that is likely to be measured" without disrupting the economy or causing huge losses in the sectors that have benefited most from low rates, such as real estate, emerging market equities and junk bonds.