|
Greenspan hints hard
|
 |
January 13, 2000: 11:30 p.m. ET
Suggests strong growth needs to be kept in check to avoid recession; talks of 'speculative' bubble
|
NEW YORK (CNNfn) - Strongly suggesting that an interest-rate hike is near, Federal Reserve Chairman Alan Greenspan said Thursday that the Federal Reserve will do what's necessary to ensure the U.S. economy continues on its path of record expansion and not veer off course into recession.
In prepared remarks to a 1,900-strong dinner audience at the Economic Club of New York, Greenspan said the Fed regrettably "doesn't have the luxury of awaiting a better set of insights" into the rapid changes occurring in the U.S. economy - namely the progress of technology and productivity which have helped defy the odds of the traditional boom-and-bust business cycle.
"Indeed, our goal, in responding to the complexity of current economic forces, is to extend the expansion by containing imbalances and avoiding the very recession that would complete a business cycle," Greenspan said.
Bracing for rate rise
His comments came as investors brace for the Fed's first policy meeting of the year, a meeting at which most analysts and investors expect an inflation-fighting increase in short-term interest rates. Higher rates make borrowing more expensive for consumers and businesses, slowing economic growth and keeping prices in check.
The next Federal Reserve Open Market Committee meeting takes place Feb. 1-2. The Fed funds rate - the target rate the Fed sets by which banks lend funds to each other overnight - is now 5.5 percent.
Economists read the Fed chairman's remarks as further evidence that a rate hike is coming.
"Greenspan's speech gave us the strong impression the Fed will likely raise interest rates by 25 basis points at the next Federal Open Market Committee meeting. Judging from the speech, the Fed will continue to keep a tightening bias for the time being," said Hiroyuki Miki, deputy manger of the treasury department at Sumitomo Bank in
Tokyo.
"It supports the view that the Fed will raise rates at the February meeting," said Kieran Davies an economist at ABN Amro, Australia.
"Nothing leaps out that they want to do an aggressive tightening and also the data that they have had out would not warrant a 50 basis point rise, I think you would still lean towards 25 for the U.S.," said Davies.
More "New Economy" talk
In remarks with a more muted tone than his now-famous "irrational exuberance" speech of a few years back, Greenspan nonetheless expressed caution that the economy could be viewed 10 years from now as "just one of the many speculative bubbles that have dotted human history."
He also expressed concern about the current valuations on high-flying Internet stocks, which he characterized as "outsized" and "unsettling."
At the same time, his remarks focused on the now-familiar theme of the "New Economy" and the benefits it's brought to Americans in the form of a robust job market, stable consumer prices and unprecedented gains in paper wealth through rising stock prices and other asset values.
What's indisputable, he said is that the evolution of technology over the past half century has "now begun to bring about awesome changes in the way goods and services are produced and, especially in the way they are distributed to final users."
Companies such as Amazon.com (AMZN) and Yahoo! (YHOO) that didn't even exist as publicly traded companies 10 years ago are just two of hundreds of examples of how technology has created massive gains in the stock market, leading the Dow Jones industrial average and Nasdaq composite index to records in 1999.
Greenspan estimated that the skyrocketing prices of stocks has boosted economic growth to such a degree that they are responsible for 1 percentage point of the 4 percent per year GDP growth recorded since late 1996. "Thus the impetus to spending from the wealth effect by its very nature cannot persist indefinitely," he said.
The U.S. economy is poised to enter its 107th consecutive month of uninterrupted expansion in February with little evidence of accelerating inflation, mainly because of a "once-in-a-century acceleration of innovation," particularly in information technology, Greenspan said.
"Through the so-called 'wealth effect', these gains
have tended to foster increases in aggregate
demand beyond the increases in supply," Greenspan said. Such demand could only be filled through increase in imports, immigration and employment rates, he said.
"The bottom line, however, is that, while immigration and imports can significantly cushion the consequences of the wealth effect and its draining pool of unemployed workers for awhile, there are limits," Greenspan said.
In typical fashion, Greenspan tried very hard to provide the audience and financial markets with a balanced view of the current state of the U.S. economy and the pros and cons surrounding its almost unprecedented gains.
But, in equally typical fashion, the Fed chief opted to end his speech on a somewhat melancholy note, suggesting unforeseen events such as the economic meltdown seen in Asia and Eastern Europe could bring an end to the most affluent of times America has ever seen.
"These extraordinary achievements continue to be bedeviled by concerns that the so-called New Economy is spurring imbalances that at some point will abruptly adjust, bringing the economic expansion, its euphoria, and wealth creation to a grinding halt."
Change in bias rules
In a question-and-answer session following his remarks, Greenspan said the central bank plans to unveil new rules governing how it announces so-called "bias" shifts to financial markets.
The Fed in May began reporting changes in its bias on interest rates immediately following its Federal Open Market Committee meetings. That led to confusion among investors, particularly after the Fed adopted a "neutral" bias after it's June rate hike, then raised rates anyway in August.
"We will release very shortly a whole set of actions which we will use to focus on this question and we will do it before the next FOMC meeting," he said. "It is very useful for the market to know what we're doing, anticipate what we're going to do and have a general sense that they are not surprised by the central bank."
CPI
Greenspan also noted the imperfections of the government's measure of prices for goods and services, known as the consumer price index. With the progress of technology and the newfound wealth Americans have based on factors other than just salary, "it's clearly not indicative of what we need to know about consumer inflation," he said.
The Labor Department will release December's tally on consumer prices Friday at 8:30 a.m. ET. 
-- Reuters contributed to this report
|
|
|
|
|
|
Federal Reserve
|
Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney
|
|
|
|
 |
|
