Federal Reserve Chairman Alan Greenspan is
expressing new worries that the soaring stock market could lead to an overheated U.S. economy.
|Federal Reserve Chairman Alan Greenspan worries about 'wealth effect'
Private economists viewed Greenspan's comments as a further
indication that the Fed will boost interest rates at its next
meeting on Feb. 1-2.
But Wall Street investors pushed stock prices higher Friday, with
the most closely watched indexes all in record territory. The Dow
Jones industrial average was up 131 points at 11,713 with the
technology-heavy Nasdaq composite index and the broader Standard &
Poor's 500 index also showing big gains.
The Clinton administration's chief economic spokesman, Treasury
Secretary Lawrence Summers, refused to comment directly Friday on
Greenspan's worries that the high-flying stock market, by boosting
consumer spending, could threaten inflation pressures down the
Calling Greenspan's comments a "thoughtful speech," Summers
said the administration continues to believe the best approach to
managing the economy is ensuring that the government's policies
support good economic fundamentals.
Summers, who will be in Tokyo on Jan. 21 with Greenspan for a
meeting of finance officials from the world's seven largest
economies, said it is important for America's allies to push
forward with efforts to strengthen global growth and help alleviate
America's soaring trade deficit.
In Greenspan's remarks to the Economic Club of New York Thursday
night, he noted that many economists estimate that fully one-fourth
of annual economic growth since 1996 about 1 percentage point of
the 4 percent growth rate has come from the "wealth effect" of
consumers spending more because of their rising investment
Greenspan said this added consumer demand is taxing the
economy's resources and if not moderated could lead to rising
inflation because of tight labor markets and stretched production
"It is this imbalance between growth of supply and growth of
demand that contains the potential seeds of rising inflationary and
financial pressures that could undermine the current expansion,"
Greenspan told his audience of top economists and Wall Street
But at the same time, Greenspan moderated his inflation worries
by noting that at present the economy has been able to grow at a
strong rate without pushing prices higher.
"Not only is the expansion reaching record length, but it is
doing so with far stronger-than-expected economic growth,"
Still, private economists said Greenspan's worries about
inflation problems down the road left little doubt in their minds
that the central bank will raise rates again in February.
"Greenspan continues to be worried that consumer spending and
demand are greater than potential supply," said David Jones,
economist at Aubrey G. Lanston & Co., who was in the audience for
Jones said he expected the Fed will follow up its February rate
increase with at least one more quarter-point boost in the federal
funds rate, the interest that banks charge on overnight loans,
probably at the March meeting.
But Jones said Wall Street investors who came to the speech
fearing that Greenspan would sound an even more hawkish note on
inflation were likely to be relieved that he balanced his inflation
worries with extensive praise for how well the economy is doing at
Greenspan said while economists 10 years from now undoubtedly
will have a clearer picture of the new forces at work in the
economy, such as rising productivity, the Fed can't wait that long
to make its decisions.
"Regrettably, we at the Federal Reserve do not have the luxury
of awaiting a better set of insights," Greenspan said. "Indeed,
our goal, in responding to the complexity of current economic
forces, is to extend the expansion by containing its imbalances and
avoiding the very recession that would complete a business cycle."
During a question and answer session following his speech,
Greenspan said the central bank would release before its February
meeting a set of guidelines intended to help financial markets
better interpret the Fed's new policy of revealing changes in its
so-called directive. The directive is intended to signal the future
course of interest rates but so far has left markets confused.
Greenspan said that when economists look back from the year 2010
on the current period, they may well conclude "at the turn of the
millennium, the American economy was experiencing a
once-in-a-century acceleration of innovation which propelled
forward productivity, output, corporate profits and stock prices at
a pace not seen in generations, if ever."
But Greenspan, who has worried at various times about
over-exuberance on Wall Street, suggested that the 2010 review
might conclude alternatively that "a good deal of what we are
currently experiencing was just one of the many euphoric
speculative bubbles that have dotted human history."