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Greenspan defends hikes
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April 13, 2000: 1:43 p.m. ET
Fed chairman denies his agency is attempting to manage 'wealth effect'
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NEW YORK (CNNfn) - Federal Reserve Chairman Alan Greenspan Thursday defended his agency's decision to impose successive increases in short-term interest rates the last 10 months, despite the apparent lack of inflationary pressures. However, he staunchly denied the Fed was looking to deflate equity markets as a method of managing the wealth effect.
Speaking before the Senate Banking, Housing and Urban Affairs Committee, Greenspan declined to comment directly on how the Fed's decision to raise short-term interest rates five times since last June might be affecting the stock market. However, he said the Fed should not second-guess the "judgment of millions of investors."
 "I would scarcely want to get involved in the exercise of trying to determine at what point the prices should stabilize," he said. "We have an exceptionally efficient market and I think we should be quite happy with that."
Greenspan's comments come on the heels of a steep technology sell-off and overall market skittishness recently that has left Nasdaq composite index in bear market territory, and also left both the Dow Jones industrial average and the Nasdaq in negative territory for the year.
Some economists have attributed the volatility in part to the Fed's successive rate increases, designed to cool a red-hot economy that continues to show few signs of slowing down, and act as a pre-emptive strike against inflation.
But while Greenspan has often attributed the economy's momentum to the so-called "wealth effect," or the dramatic increase in consumer confidence and spending driven by stock market-related gains, he said Thursday that the Fed was not interested in managing that wealth, only the disparity between that wealth and economic fundamentals.
"I continue to deny ... that our goal is to jawbone the stock market," he said. "Our actions are directed not at the wealth effect. Our actions are directed at the imbalances that are [generated] by the wealth effect on the economy."
While acknowledging that some investors cannot distinguish between the stock market and a casino, Greenspan said there are enough people in the market who focus on fundamentals to keep stock prices from getting out of control. (746K WAV 746K AIFF)
Rate hikes 'appropriate'
Greenspan noted that since the Fed first took action on rates last June, the U.S. economy has largely stayed robust with few apparent signs of inflationary pressures. He got further evidence of that trend with the core Producer Price Index -- a key inflation indicator -- for March showed relatively benign growth.
"If you look, however, at the underlying costs of American business, I see no evidence of acceleration," he said.
The Fed chairman said if his agency had not taken the action on rates it did, it would have been forced to "significantly" raised monetary liquidity.
"Having kept the rates where they were last year would have induced a degree of excess liquidity in the system, which is where the inflation concern comes from," he said.
Instead, the market has reacted in an appropriate manner, Greenspan said, by raising the long-term borrowing costs for U.S. corporations.
"The markets are working in the appropriate direction," he said. "Long-term, real interest rates have been rising and that is exactly what you would expect to happen." 
-- from staff and wire reports
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