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The stock and bond markets tend to hang on every word Alan Greenspan speaks. So what happens when those words include "goodbye"? After the second longest reign as Federal Reserve chairman in the history of the position, Greenspan is expected to retire at the end of his current term in 2004. But no clear successor has emerged.
Analysts expect markets to dip once a successor is named, but predict a swift recovery if skittish investors are won over. A reputation as an inflation fighter and a grasp of the Fed's limitations are what the markets will look for. "My bet is that under a Bush administration it will be someone close to the equity markets," says J. Patrick Raines, an economics professor at the University of Richmond in Richmond, Virginia. Such a choice will go a long way to reassure the markets, particularly because it resonates with Greenspan's own policies.
Treasury Undersecretary John Taylor tops the list of candidates, followed by Federal Reserve governors and private sector economists Larry Kudlow, Wayne Angell and Marty Regalia. "There's also a long list of potential academic economists, but the markets tend to prefer non-academicians," says Albert E. Parish Jr., director of the Center for Economic Forecasting at Charleston Southern University.
If Greenspan's departure rattles the markets, the question is whether the Federal Reserve system has become too much of a one-man show. Even though the central bank's power has fallen over the past 20 years, the Fed still wields enormous pyschological influence. "The Fed's power," says Parish, "is the ability to affect expectations."
Greenspan has managed those expectations so deftly, some credit him with the 1990s bull market. But the real credit, experts say, should go to American workers. "Increased productivity is what drove the economy in the 1990s and early 2000," Parish acknowledges. Still, Greenspan's influence will be an important factor as the economy recovers. "Mr. Greenspan's challenge and aim," Parish adds, "is to reassure the financial markets and 'Main Street' Americans that the economy will be fine in the long term."