Last of the Fed watchers

I arrived in the City in 2002, in the wreckage of the dot-com bust. It was not the most auspicious moment to begin a career in markets, but it was an education. Spreads were wide, equity markets were still in retreat, and somewhere in Washington a 76-year-old Fed chairman was preparing to cut rates to one percent. I learned to listen carefully to what Alan Greenspan said. More importantly, I learned to listen to what he did not say.

He served five terms. He oversaw two of the longest economic expansions in modern history. He gave us the phrase irrational exuberance, delivered in 1996 with the precision of a man who knew exactly what he was doing, and then watched as markets ignored him for another four years. That, too, was instructive.

Greenspan's genius was not the policy. It was the restraint. A public language so carefully constructed that it required professional translators. Testimony that resolved nothing deliberately. The Fed watcher, that now-extinct breed, built entire careers on parsing his syntax. What none of us fully grasped at the time was that the opacity was not a communication style. It was a tool. Uncertainty kept markets honest. When participants could not be certain of the next move, they priced in risk. They hedged. The art of keeping your cards close to your chest, practised at the level of the world's most powerful central bank, turns out to be a surprisingly effective constraint on excess.

Forward guidance replaced all of that and brought problems of its own. Clarity is not always wisdom. The paradox of modern finance is that the more information we possess, the less comfortable we seem to be with uncertainty. Greenspan belonged to an era that accepted uncertainty as the price of participation. Markets were expected to discover the future, not be briefed on it. As Kevin Warsh inherits the Eccles Building, the age of central bankers who understood the value of uncertainty feels further away than ever.