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The Fed chairman’s new clothes

Never bet against the Fed. That's the advice many in the US are giving at the moment. It forms part of their core argument that the US cannot be heading into recession, because the Federal Reserve, and especially its chairman, Alan Greenspan, is on the case.

Using the last eight years as a guide, that might seem reasonable. The Fed's monetary policy, as well as Greenspan's influence on the early years of Clinton's fiscal policy - he told Clinton to increase taxes or he would increase interest rates - helped turn a period of recovery from recession into one of the most prosperous phases of the country's history. And Greenspan's role in keeping the US and, by extension, the global economy on track after the Russian crisis of 1998 is well documented.

But to expect the Fed to be able to prevent a recession is surely to ask too much of one institution, and one economic tool. Rate cuts helped in 1998 because they restored a degree of stability to the capital markets - and for western countries the crisis was largely a capital markets event. It was also an external crisis, which could threaten the domestic US economy only if it got entirely out of hand.

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