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Fed chief: no need for hike
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June 10, 1998: 7:16 p.m. ET
Subdued inflation, strong spending still fuel growth; cautious on markets
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NEW YORK (CNNfn) - Reiterating his long-time stance that has become a cornerstone of his economic policy, Federal Reserve Chairman Alan Greenspan told lawmakers Wednesday that "subdued inflation" presents no need for the central bank to tighten monetary policy.
"We at the Federal Reserve, recognizing the powerful forces of productivity growth and global restraint on inflation, have not perceived to date the need to tighten policy," Greenspan said in his speech before the Joint Economic Committee of Congress in Washington.
Long known as an inflation hawk, the nation's top central banker received praise from lawmakers for his unyielding focus on price stability.
The bond market rallied as word of his comments spread through the investment community, though the stock market finished lower on weakness in technology and tobacco shares.
Greenspan's remarks came as a growing number of Fed watchers said the central bank is leaning toward a policy of higher short-term interest rates, which would increase the cost of borrowing.
The central bank's policy-setting Federal Open Market Committee is scheduled to meet June 30-July 1.
The benchmark 30-year Treasury bond finished up 1-9/32 in price, pushing the yield (which moves in the opposite direction) down to 5.69 percent. The Dow Jones industrial average lost 78.22 points to close at 8,971.70.
Wayne Angell, Bear Stearns chief economist, told CNNfn that although an interest rate hike wasn't on the horizon, the bond market reacted as if Greenspan said he would lower interest rates.
Angell, a former Federal Reserve governor, said such low bond yields have historically suggested an upcoming recession. [413K WAV] or [413K AIFF]
"It seems to me that… the yield is close to the very bottom of the trading range," Angell said.
But Greenspan remained cautious about the viability of the financial markets' performance in light of the current economic strength.
Stock and bond prices have been driven "perhaps to levels that will be difficult to sustain unless economic conditions remain exceptionally favorable -- more so than might be anticipated from historical relationships," Greenspan said.
Still, even with unemployment falling to 4.3 percent -- the lowest level in 28 years -- and growth spurting ahead at a 4.8 percent rate in the first quarter, inflation actually has declined this year, he said.
The economy is still benefiting from "a virtuous cycle" in which low inflation and generally favorable credit conditions lead to higher equity values and spending, which in turn helps fuel expansion and productivity.
"The essential precondition for the emergence, and persistence, of this virtuous cycle is arguably the decline in the rate of inflation to near price stability," he added.
Greenspan cited an unusual amount of uncertainty because of the continuing economic turmoil in Asia. But, he said, the American economic expansion -- now in its eighth year -- has not been threatened.
"The current economic performance, with its combination of strong growth and low inflation, is as impressive as any I have witnessed in my near half-century of daily observation of the American economy," Greenspan said. 
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