The Fed Chief`s Treatment - 500 Beiträge pro Seite

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July 21, 2000


The Fed Chief`s Treatment

By RICHARD W. STEVENSON


The Associated Press
Alan Greenspan, the Federal Reserve chairman, delivered an on-the-one-hand, on-the-other-hand assessment of the economic outlook in Senate testimony Thursday, leaving the door open to further interest rate increases.

ASHINGTON, July 20 -- Alan Greenspan, the Federal Reserve chairman, said today that there was not yet enough evidence to conclude that the economy had slowed to a noninflationary pace, and he left the door open to further interest rate increases as soon as next month.
In testimony before the Senate Banking Committee, Mr. Greenspan delivered an on-the-one-hand, on-the-other-hand assessment of the economic outlook, noting clear signs of slowing in recent months but warning that growth could rebound and that inflation by some measures appeared to be creeping up.

Given the uncertainties, Mr. Greenspan said, it was "much too soon to conclude" that the threat of a destabilizing surge in prices and wages had receded. His remarks suggested that Fed officials would continue to focus on incoming economic data before deciding whether to raise short-term interest rates again at their next meeting, on Aug. 22.

Stressing that the economy was still characterized by a combination of steady growth, low unemployment and an expanding trade deficit, he said the Fed would "need to be alert to the risks that high levels of resource utilization may put upward pressure on inflation."

But even as he kept his options open, Mr. Greenspan indicated that he saw no need for a prolonged series of rate increases that might leave the economy flirting with recession. Asked if achieving price stability would require the Fed to drive the unemployment rate up toward 5 percent from its current level of 4 percent, Mr. Greenspan said he did not think so.

"I think the evidence indicating that we need to raise the unemployment rate to stabilize prices is unpersuasive," he said. He quickly added, however, that he was not sure and the issue was the subject of considerable debate among economists and Fed officials.

With much of the steam having gone out of Wall Street in the winter and spring, Mr. Greenspan hardly mentioned the stock market, which he had singled out early this year as a prime source of the imbalances in the economy that could lead to higher inflation.

Investors, perhaps being overoptimistic but apparently relieved that Mr. Greenspan had not explicitly called for higher interest rates, sent stock prices up. The Dow Jones industrial average rose 147.79 points for the day, to finish at 10,843.87. The Nasdaq composite index closed at 4,184.56, up 128.93.

"There was relief in the markets because he said nothing very severe in terms of future rate increases," said Richard J. DeKaser, chief economist at National City Bank in Cleveland. "But in terms of what he actually said, he left his options completely open."

The central bank has raised its benchmark short-term interest rate by 1.75 percentage points, to 6.5 percent, in six steps the last year. After growing at a torrid pace earlier this year, the economy cooled off considerably, but the Fed has left the financial markets guessing whether the slowdown has been sufficient for it to declare an end to this cycle of interest rate increases.

If analysts and investors were hoping for a clear answer from Mr. Greenspan today, they were disappointed. Because his testimony was intended to reflect the thinking of the Fed`s entire policy making committee, what they got instead was a glimpse at the debate within the central bank about the economy`s path and how many more rate increases, if any, it would take to squelch the emerging inflationary pressures and assure the continuance of the long expansion.

Growth in general and consumer spending in particular have "slowed noticeably this spring from the unusually rapid pace observed late in 1999 and early this year," Mr. Greenspan said.

From one perspective, he said, it would be a mistake to put too much stock in the slowdown, since previous episodes of cooling during this business cycle have been followed by sharp accelerations in growth. But from another viewpoint, he said, there are bits of evidence that this slowdown could be longer-lasting.

The stock market is no longer rising at a rate that would lead consumers to spend freely. Households are burdened by rising debt levels. Higher oil prices are putting the brakes on the entire economy. And after buying homes, cars, refrigerators and other big-ticket items at a prodigious pace for the past several years, consumers could be expected to take a break.

Mr. Greenspan did not say which camp he puts himself in. But he said that the real question might prove to be what happens to the economy`s improving efficiency if the slowdown proves to be real, and on that score he gave an optimistic assessment.

In the past, slowdowns in growth were often accompanied by a falloff in the growth rate of productivity, or output per hour of work. As productivity drops, inflation tends to rise, putting pressure on the Fed to continue raising rates.

But if productivity growth should remain strong as the economy slows, it would help keep inflation in check, giving the Fed more leeway to hold down rates. Mr. Greenspan said the evidence is that productivity is holding up well.

"So far there is little evidence to undermine the notion that most of the productivity increase of recent years has been structural and that structural productivity may still be accelerating," he said.

Mr. Greenspan appeared before the banking committee under an agreement that calls for the Fed to continue reporting twice a year to Congress on monetary policy despite the expiration of a legal requirement to do so.

The written report he submitted today forecast a slowdown in growth this year from the 5.4 percent annual pace of the first quarter, with gross domestic product for the year projected to run at 4 to 4.5 percent.

But the report also included a more pessimistic inflation forecast than that the Fed provided to Congress in its last report, in February. It projected that inflation this year would run at a 2.5 percent to 2.75 percent rate, compared with 1.75 percent to 2 percent under the old projection. Although the report said inflation would decline to 2 to 2.5 percent next year, it warned that at those projected levels inflation would have edged up from where it was in 1997 and 1998, when it was consistently under 2 percent.

"Such a trend, were it not to show signs of quickly stabilizing or reversing, would pose a considerable risk to the continuation of the extraordinary economic performance of recent years," the report said.

Fielding questions from senators, Mr. Greenspan repeated his call for Congress and the Clinton administration to use the federal budget surplus for debt reduction rather than for tax cuts or spending increases. The surplus, he said, provides an important buffer should the economy run into trouble.

Asked about the health of the banking system and its ability to weather a recession, Mr. Greenspan said the system could "resist fairly significant economic disruption without a major problem," although he said he was concerned that some banks have grown too lax in assessing credit risks.

The Fed chairman said he was concerned about the expansion of the trade and current account deficits. But he said the United States had not had any problem financing those deficits with investment from abroad because the country offered higher rates of return than anywhere else.

In response to a question, he criticized legislation sponsored by Senator Fred Thompson, Republican of Tennessee, that would link China`s access to American capital markets to the Chinese government`s record on the spread of weapons and weapons technology.

In particular, he said, the legislation would be ineffective because capital markets essentially operate without borders and if Chinese companies were unable to raise money in New York, they would be able to borrow in dollars in London or Paris.

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