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Greenspan outlook wary
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February 24, 1998: 12:17 p.m. ET
Despite generally upbeat assessment, Fed chief admits to 'tentative' outlook
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NEW YORK (CNNfn) - U.S. Federal Reserve Chairman Alan Greenspan said the nation's economy is "finely balanced" in testimony before Congress Tuesday, but said he would still remain wary.
Greenspan said the Fed's forecast for 1998 is "more tentative than usual." But he added, "Moderate growth is likely in store."
Greenspan made the remarks as part of his twice-yearly Humphrey-Hawkins report to the House Banking subcommittee.
Asian uncertainty was the reason for his hesitancy, he said, although he believes that the effects of that region's financial troubles have helped on the inflationary front.
Invoking what is becoming a familiar weather motif regarding Southeast Asia, Greenspan said the country's economic outlook is "less assured as of late because of the storm clouds massing over the Western Pacific and headed our way."
The Fed chairman expects a decrease in U.S. exports and reduced willingness by U.S. firms to build up inventories as they foresee weaker demand.
He said the economic factors from Asia would be the main criteria used by the Federal Reserve to decide its next rate move.
"The key question going forward is whether the restraint building from the turmoil in Asia will be sufficient to check inflationary tendencies that might otherwise result from the strength of domestic spending and tightening labor markets."
He worried, however, that the Federal Reserve, which often takes preemptive action against what it sees as inflationary pressures, may be constrained by Asia's problems.
If the Fed were to raise interest rates in advance of possible inflation, the central bank could open itself up to criticism of choking off any progress being made by U.S. firms.
Greenspan chided investors about being too "complacent" about evaluating the risks of securities. "Quite possibly, 12 or 18 months hence, some of the securities purchased on the market could be looked upon with some regret by investors."
Greenspan was not without praise for the economy. He touted the nation's deft use of technology, both in factories and offices along with the country's capital markets, as enhancing efficiency and boosting productivity. (249K WAV) or (AIFF)
With characteristic caution, Greenspan would not suggest, as some have, that technology and productivity gains are leading to a friction-free economy. Although admitting that there is "something different" in the current economy, he said it is no new era.
The budget recently proposed by U.S. President Clinton, which projects a possible federal surplus, could lead to lower long-term rates, said Greenspan, but he explained that "the downside room for long-term rates, while there, is clearly much more limited than the declines that have occurred in recent years."
It was about one year ago that Greenspan made his oft-quoted remark about "irrational exuberance" after a strong run-up in the nation's stock markets. It turned out that the comment was a precursor to an interest rate rise later on.
However, with Asian financial turbulence possibly presenting problems for the country, few are worried that the Federal Reserve will hike interest rates soon. Indeed, most look for the Fed to ease up on interest rates.
"He's probably going to have to force interest rates lower in the latter half of the year," said Sam Stovall, sector strategist at Standard & Poor's, citing continued Asian uncertainty.
The federal funds rate for overnight bank lending is currently 5.5 percent. The Fed last changed it in March 1997, increasing it by 0.25 percentage point. The Federal Open Market Committee next meets March 31.
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