Changing of guard at Fed worth more than passing interest

At the end of January, the most influential person in the economic life of Hong Kong is due to retire.

Before you pop the corks, Henry Tang is not quitting, nor Donald Tsang. And do not sell your shares in Hutchison and Cheung Kong; Li Ka-shing is not calling it a day.

In any case, Mr Tang and Mr Tsang control an annual budget worth just $250 billion, while according to Forbes, Mr Li is worth only a paltry $100 billion. That makes them all small potatoes beside Hong Kong's most important economic decision-maker, who sits 13,000 kilometres away in Washington - US Federal Reserve chairman Alan Greenspan.

Because of Hong Kong's currency peg to the US dollar, our interest rates move in lockstep with America's. That means later today, when Mr Greenspan convenes the fifth meeting this year of the Fed's monetary policy-setting committee, he will be making critical decisions governing Hong Kong's entire $2.24 trillion money supply.

Next January, after 181/2 years at the helm, Mr Greenspan will retire, just short of his 80th birthday. The political and economic beliefs of his successor will exert enormous influence over Hong Kong's economy. That successor will be chosen by President George W. Bush.

Given Mr Bush's history of picking close political allies for nominally independent posts - Paul Wolfowitz to the World Bank, John Roberts to the Supreme Court - he is sure to choose another for the Fed. That means the chosen candidate is likely to accord with White House economic thinking, including on the relative unimportance of America's US$650 billion current account deficit - essentially the overdraft Americans have run up with the rest of the world by spending too much and saving too little.

The two most commonly cited candidates, Ben Bernanke, currently Mr Bush's top economic adviser and a former Fed governor, and Glenn Hubbard, a former Bush adviser, both appear to fit the bill. Mr Bernanke has argued that Asian countries will continue to fund the deficit by lending their excess savings to America. Mr Hubbard views the deficit as a result of America's economic strength. Unlike Mr Greenspan, neither appears to regard it as an economic threat. This view could have important consequences for Hong Kong.

A Fed governor nervous about the size of the US current account deficit might be inclined gradually to nudge short-term interest rates higher in an attempt to dampen consumer spending and encourage saving. In time that would mean fewer foreign imports and less need for foreign money to fund investment; the deficit would slowly shrink.

On the other hand, an untroubled Fed governor might be less of an interest rate hawk. In Hong Kong, persistently low rates would encourage another property boom. The risk would then come if the markets took fright at the growth of America's overdraft and sold the US dollar, forcing the Fed to jack up interest rates rapidly to defend the currency. That would burst Hong Kong's bubble.

Perhaps we should not be too concerned, however. Whoever he is, the new Fed chairman will be a formidable intellect, and may well, as he grows into the job, shed any partisan political leanings in favour of impartiality. After all, in his youth Mr Greenspan was a devotee of the objectionable - and frankly quasi-fascist - ideas of author Ayn Rand. Happily, he grew out of all that.