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Greenspan forecast: windy
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January 29, 1998: 12:01 p.m. ET
Effects of Asian economic crisis have yet to be fully felt, Fed chief says
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NEW YORK (CNNfn) - The full force of the Asian economic crisis' storm has yet to hit the United States, U.S. Federal Reserve Board Chairman Alan Greenspan warned Thursday, as he forecast the spring will bring some bad weather.
Appearing before the U.S. Senate Budget Committee to give his views on the U.S. economy, Greenspan said we have seen "only the peripheral winds of the Asian crisis."
Greenspan said he foresees "reductions in demand for our exports and intensified competition from imports. All of this suggests that the growth of economic activity in this country will moderate from the recent brisk pace."
The stakes are high. Asia buys 30 percent of the United States' exports. Although forecasts about Asia's impact vary, the Economic Policy Institute predicted 1.1 million American jobs could be lost due to the region's troubles.
When Greenspan appeared before Congress in October, he predicted the Asian crisis could be a "salutary event" and might do his job for him by slowing inflationary pressures without choking off expansion.
Gains in productivity have allowed the United States to avoid some of the higher labor costs that the expansion should have triggered, but Greenspan said those gains could not go on forever.
"The likelihood is that we shall be seeing some lower prices on imported goods as a result of the difficulties in Asia," predicted Greenspan, who said that those price decreases may lessen some inflationary pressures. "But they will not permanently suppress the risks inherent in the tightened labor markets."
Greenspan is expected to speak at greater length about the Asian situation when he appears before the House Banking Committee Friday.
The situation in Southeast Asia has led to calls for a lowering of interest rates that possibly would jump-start growth, but some analysts think Greenspan is unlikely to ease rates any time soon.
"He will wait a while," said Erich Heinemann, economist at Heinemann Economic Research. "He always lags on the way down. It's very tough for the Fed to get rates up so, therefore, it's very reluctant to put them down."
The Federal Open Market Committee will meet next week to decide U.S. interest rate policy.
In Washington, Greenspan sat in the middle of a government licking its chops at the prospect of spending a projected budgetary surplus. While the Clinton Administration would like to let the money flow into funding for Social Security, Republicans on the Hill are targeting the money to be used toward tax cuts.
Greenspan has been an avid proponent of lower deficits and underscored the point Thursday.
"We most not allow the recent good news on the budget to lull us into letting down our guard. Although many of the individual budget proposals have merit," he said, "we should be aiming for budgetary surpluses and using the proceeds to retire outstanding federal debt."
Greenspan went on to implicitly endorse, in part, President Clinton's Social Security proposal, saying that while the program is not immediately in crisis, reform is needed to avert a funding shortfall in the future.
Greenspan said that, ideally, he advocates a gradual move toward a privatized system.
However, he criticized privatization plans that involve simply investing existing Social Security funds in the stock market. Instead, he favored proposals for a system that included private contributions to retirement funding because that would boost overall national savings.
"The issue of going to privatization is an issue, as far as I'm concerned, more of facilitating a move towards full funding of the system which will raise the national savings rate and, in so doing, assure that there are adequate funds for retirement," he said.
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