It’s the end of an era for Fed

WASHINGTON – Alan Greenspan, the nation’s economic guardian for 18 1/2 years, and his colleagues are poised to raise borrowing costs yet again at his final Federal Reserve meeting today.

The expected increase – intended to keep the economy and inflation on an even keel – will come as Greenspan, the second-longest serving chairman, ends his era at the central bank.

Greenspan, 79, plans to turn the reins over to his one-time Fed colleague Ben Bernanke, 52, who more recently has been chairman of President Bush’s Council of Economic Advisers. The Senate is expected to confirm Bernanke’s nomination today. His swearing in as the new Fed chief probably will occur Wednesday.

The changing of the country’s economic guard has important implications for millions of investors, large and small.

“This is Greenspan’s last hurrah. The swan song for the big guy,” said Richard Yamarone, economist at Argus Research.

Federal Reserve policy-makers, at their previous meeting in December, suggested that their nearly two-year credit tightening campaign probably will be winding down. But policy-makers differed as to how much higher rates would need to go to accomplish their mission.

That will be among the challenges Bernanke will confront.

At today’s meeting, though, the Fed is expected to add one-quarter of a percentage point to an important short-term interest rate known as the federal funds rate. That would put the funds rate, the interest banks charge each other on overnight loans, at 4.50 percent, and would mark the 14th increase since June 2004.

In response, commercial banks would raise their prime lending rate — for certain credit cards, home equity lines of credit and other loans — by a corresponding amount to 7.50 percent.

Those moves would leave borrowing costs at their highest in more than 4 1/2 years.

It is part of a process to bring borrowing cost back to more normal levels. The Fed had sliced its funds rate to a 46-year low of 1 percent as it sought to rescue the economy from the fallout from the bursting of the stock market bubble in 2000, a recession and terror attacks in 2001 and a wave of corporate accounting scandals that rocked Wall Street.

The Fed’s rate increases also are aimed at fending off inflation. Consumer prices in 2005 rose by 3.4 percent, the most in five years. The main culprit: lofty energy prices. Economists are still predicting inflation won’t be as bad this year, but they admit that the energy situation is a wild card for the economy.

Some economists believe Bernanke at his first meeting as Fed chief on March 28 will push up the funds rate again to 4.75 percent, a move that would show he’ll be as tough an inflation-fighter as Greenspan.

“Bernanke needs to do this to send a message to financial markets that when it comes to inflation, ‘I’m not Gentle Ben, I’m Big Ben,’ ” Yamarone joked.