Fed hikes rates again as Greenspan wraps term

"Like most economists, we view the fourth-quarter number as a bit of a fluke," said Ethan Harris, chief U.S. economist at Lehman Bros.  Most of the weakness, especially in consumer spending, appeared to be concentrated in the early part of the quarter, when Hurricane Katrina and other storms dampened spending in parts of the country.

"More forward-looking indicators are pointing to a solid first quarter," Harris said..

He and other analysts also expect employment growth to bounce back when the latest monthly numbers are reported Friday after relatively weak figures for December.

At the same time quarterly data closely watched by Fed policy-makers showed consumer inflation rising to 1.9 percent, a bit higher than the central bank’s presumed comfort zone, analysts said. That suggests the Fed will indeed have to push rates higher.

"The Fed will remain on alert for higher inflation until the economy slows up on a sustained basis," said Harris. "They can't just cross their finger and hope inflation doesn't pop up. There is also a case for the new Fed chairman, if it’s a close call, to prove his anti-inflation credentials and do a little hike or two."

Still, with nearly two months between meetings, another rate hike is not a sure bet.

"The autopilot phase of monetary adjustment is behind us, and future rate moves will depend on the data," said Neal Soss, head of U.S. economics for Credit Suisse, in a research note.

At 79, Greenspan is stepping down at the expiration of his term as governor after winning widespread acclaim for steering the economy through many global crisis while keeping inflation low and economic growth generally strong. His 18-1/2-year tenure included a 10-year expansion from 1991 to 2001 that was the longest of the postwar era and two recessions, including the relatively mild downturn of 2001.

Greenspan, a former business consultant and Republican economic adviser, originally was nominated by President Reagan and took office in August 1987. He established his reputation just two months later when he managed to keep financial markets operating through the devastating stock market collapse that began Oct. 19, 1987.

He was renominated by Presidents Bush, Clinton and Bush and by the end of his term had gained nearly mythical status, respected by political leaders on both sides of the aisle in Washington.

Despite intense media interest, Greenspan kept a low profile right until the very end of his tenure, at least in part to ensure a smooth transition. In a modest nod to the significance of the moment, the Fed allowed photographers and a video camera into the Fed board room at the conclusion of Tuesday's meeting.

Greenspan will have plenty of opportunity to speak out afterward, with plans for a new consulting business, an active calendar of speaking engagements and a book.

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

Fear trumps efforts to solve crisis Treasury plan to buy bank stakes carries risks Amid crisis, states forced to take ‘drastic action’ Global rate cut does little to calm markets Economists getting gloomier about outlook How massive bailout plan will affect you Economists say rescue plan still needs work Rescue package still faces House hurdles Bailout deal nears, but will it work? Bailout plan sparks wide debate in Congress Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: