Greenspan sees risks
|
|
March 30, 2000: 3:40 p.m. ET
Fed chief warns that rising stock prices are fueling risks for the economy
|
NEW YORK (CNNfn) - Sharp gains in stock prices and the paper wealth that has created for Americans is leading to a developing imbalance in the U.S. economy that is threatening to spark faster inflation and derail the record expansion, Federal Reserve Chairman Alan Greenspan said Thursday.
In a letter answering questions from senators which arose during his Feb. 17 Humphrey-Hawkins testimony, Greenspan said the Fed's recent spate of interest rate increases was not for "jawboning" the stock market or targeting stock prices, as many analysts and investors have suggested.
"Rather, the Federal Reserve is concerned about imbalances between aggregate demand and supply and their implications for inflation and thus sustainability of the expansion," the chairman said. "The sharp increase in equity evaluation appears to have been an important factor behind the apparently developing imbalance."
The written comments, released by the Committee on Banking and Financial Services, came as the Nasdaq swooned more than 5 percent, bringing its loss in percentage terms for the week to more than 9 percent. The magical number of 10 percent is what Wall Street officially deems as a correction.
Reining in margin?
Greenspan also addressed the issue of raising margin requirements -- where an investor can borrow cash based on the market value of their holdings to purchase additional stock. Lawmakers in Washington, concerned about another 1920s-style market crash, have grown increasingly vocal about the Fed's insistence at holding margin requirements where they are.
"With regard to margin requirements, studies suggest that changes in such requirements have no appreciable and predictable effect on stock prices," Greenspan said. "Nonetheless, the Federal Reserve recognizes that considerable risks can be involved in the purchase of equity on margin, especially in volatile markets, and believes lenders and borrowers need to assess carefully the risks they are assuming through the use of margin."
Currently, U.S. margin requirements, by law, dictate that investors can leverage themselves up to 50 percent of the market value of their portfolios. In other words, an investor with $50,000 in stock could potentially borrow another $25,000 to purchase additional securities.
Greenspan was also asked whether the Fed's short-term monetary policy operating procedures -- raising short-term interest rates and spurring banks to raise their prime lending rate -- are having a significant effect on stock prices.
Stocks versus rates
"Our operating procedures, as you suggest, do tend to smooth out short-run fluctuations in short-term interest rates," Greenspan said. "However, the risks of investing in equities come primarily from uncertainty about future earnings and about the longer-term interest rates at which those future earnings should be discounted, and not mainly from the possibility that the short-run cost of financing stock positions could increase," he said.
As for inflation, Greenspan noted rather candidly that the government's measurement of consumer prices "may be giving misleading signals about the true rate of inflation," indicating it was a "troubling issue."
"Especially in a world in which products are becoming more and more difficult to define, price measurement will be an increasing challenge," he said. At the same time, "I do not see any signs that we have a problem of this sort," he said.
Fed officials next meet May 16 to discuss the economy and monetary policy. Most analysts expect the Fed's Open Market Committee will lift its benchmark fed funds rate another quarter percentage point to 6 percent.
|
|
|
|
U.S. Federal Reserve
|
Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney
|
|
|
|
|
|