graphic
News > Economy
Greenspan warns on rates
February 17, 2000: 4:00 p.m. ET

Central bank chairman tells Congress more interest rate hikes may be needed
graphic
graphic graphic
graphic
NEW YORK (CNNfn) - Federal Reserve Chairman Alan Greenspan put Wall Street on notice Thursday that the central bank may raise short-term interest rates again to head off the inflationary pressures that continue to hover over the booming economy.
    In remarks before Congress, Greenspan said there is little evidence that the Fed's series of four short-term interest rate hikes since June 1999 have had much impact on quelling the threat of an overheated economy. He said that while inflation has remained in check so far -- surging energy prices being the notable exception -- this situation cannot last unless growth slows.
    The Fed chief linked his concerns to the tight labor market, which he said could cause the economy to inflate if workers demand higher wages and cause consumer prices to spiral upward. Unemployment has fallen to a 30-year low of 4 percent, shrinking the available labor pool - although Greenspan said that so far the tight labor market has not been accompanied by a sharp increase in wages that could drive up prices. (176.4KB WAV) (176.4KB AIFF).
    graphic"To date, interest-sensitive spending has remained robust and the FOMC (Federal Open Market Committee) will have to stay alert for signs that real interest rates have not yet risen enough to bring the growth of demand into line with that of potential supply, even should the acceleration in productivity continue," Greenspan told the House Banking Committee in his semi-annual Humphrey-Hawkins testimony.
    "Achieving that alignment seems more pressing today than it did earlier," he said. "We cannot be sure in an environment with so little historical precedent what degree of labor market tautness could begin to push unit costs and prices up more rapidly."
    
Click here to see the full Greenspan transcript

    
'Unprecedented productivity'

    Greenspan noted that despite low employment, unit labor costs - which measure wages tied to worker output - actually dropped in the second half of 1999. He tied the benign labor picture to the country's booming productivity growth, which helps keep inflation low by allowing employers to pay higher wages through increases in worker output. This continued acceleration in productivity is "unprecedented in my half-century of observing the American economy," he said.
    But at the same time, he said, these productivity gains could push soaring stock prices even higher, furthering "the wealth effect" and triggering a big boom in consumer spending that could make an interest rate increase necessary to bring demand growth back in line with supply.
    
Another rate increase?

    Several Wall Street economists said Greenspan's remarks confirm their predictions that the Federal Open Market Committee -- the central bank's policy-making committee -- will raise the federal funds rate by another quarter-percentage point on March 21, marking the fifth increase of the key interest rate since last June. Many economists also predict another rate increase at the FOMC's following meeting in May.
    "It's clear that the Fed, while it sees many favorable things in the economic environment, believes that the economy needs to slow down," said Richard Rippe, chief economist at Prudential Securities. "The clear message is there will be additional tightening."
    Rippe said that a slew of recent economic data - including reports on employment, data and industrial production - point to an economy that is surging ahead. "I think there's a bit more urgency in his tone than we might have seen a month ago," he said of Greenspan's comments.
    Another economist, Stanley Shipley, of Merrill Lynch, said he anticipates the Fed will raise rates two more times. Shipley said the economy is going to continue to expand until housing demand begins to drop.
    "That has to come down a great deal for this economy to slow down," he said.
    In response to questions from the committee, Greenspan told the committee that he was concerned about the recent rise in oil prices, which have pushed the per-barrel price above $30 for the first time since the Persian Gulf War in 1991.
    But, he said, it would be a "mistake" for the Clinton administration to tap the nation's emergency stockpile to add supplies to the market.
    "Our experience suggests we ought to leave it to the marketplace to make adjustments," he said. He also noted that because of conservation moves by businesses, the amount of energy needed in U.S. production has declined significantly in recent years.
    graphicGreenspan also issued the Fed's new economic forecast for 2000. In terms of growth, the Fed was slightly more optimistic than the Clinton administration or the Congressional Budget Office, predicting gross domestic product will expand by about 3.5 percent this year. President Clinton based his current budget on a prediction of 2.9 percent growth.
    "Although the outlook is clouded by a number of uncertainties, the central tendencies of the projections ... imply continued good economic performance in the United States," Greenspan told the committee.
    The Fed was also more optimistic that inflation will slow this year, predicting that an inflation gauge tied to the GDP will rise by about 1.75 percent to 2 percent, compared with a 2 percent increase last year.
    In the wake of Greenspan's comments, blue-chip stocks immediately came under pressure, losing about 80 points late Thursday afternoon.
    The benchmark 30-year bond rose 9/16 of a point, bringing down the yield to 6.22 percent. Analysts say the Treasury market already has factored in another interest-rate increase into bond prices. Back to top
    -- from staff and wire reports

  RELATED STORIES

Senate ratifies Greenspan - Feb. 3, 2000

Special report: Eyes on the Fed

  RELATED SITES

Federal Reserve


Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney




graphic

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.