Fed chief mostly happy

Greenspan is pleased by continued growth of nation's economy

He calls boom `outstanding'

But he says rates may have to be raised to slow demand later

January 21, 1999|By BLOOMBERG NEWS

WASHINGTON -- The U.S. economy's longest peacetime expansion is barreling along with few signs of a slowdown or higher inflation, Federal Reserve Chairman Alan Greenspan said yesterday.

"The American economy through year-end continued to perform in an outstanding manner," Greenspan told the House Ways and Means Committee. "While there are risks going forward, to date domestic demand and hence employment and output in the United States certainly has remained vigorous."

That could be too much of a good thing, the Fed chairman suggested. If the economy doesn't slow from last year's 4 percent growth rate, higher interest rates may be needed to cool demand and head off possible price increases, he said. At the same time, Greenspan indicated that the Fed isn't itching to increase the overnight bank loan rate.

"In the current state of financial markets, policy-makers are going to have to be particularly wary of actions that unnecessarily sow uncertainties, undermine confidence, and interfere with the efficient allocation of capital on which our economic prosperity and asset values rest," Greenspan said.

Greenspan also said U.S. stock prices may be too high -- a warning that sent stocks lower for less than five minutes after it was issued. The rebound instock prices in the past three months leaves them at levels that "would appear to envision substantially greater growth of profits than has been experienced of late," he said.

The Fed's concern is that an asset bubble may be developing, said Paul Kasriel, an economist at Northern Trust Co. in Chicago.

"The Fed will not raise rates in order to prick the bubble. By the same token, it's not going to cut rates until it is sure that the economy is slowing, and not just to 3 percent but to 2 percent."

The Fed chairman said Brazil's decision to let markets determine the value of its currency, the real, represents "a possible source of downside risk" for profit and growth in the United States.

Businesses surveyed by the Fed for one of its periodic regional economic outlooks -- commonly known as the beige book -- said they expect growth to be strong through the first half of the year, the Fed said.

Profit from stock sales are driving the U.S. expansion, Greenspan said.

And while asset values "are not themselves a target of monetary policy," Fed officials have to pay "particular attention" to stock price levels, Greenspan said.

The Fed's dilemma is that interest-rate increases could have a disastrous ripple effect.

"A flattening of stock prices would likely slow the growth of spending, and a decline in equity values, especially a severe one, could lead to a considerable weakening of consumer demand," Greenspan said.

In reducing interest rates last year, Fed policy-makers were not trying to influence the stock market, Greenspan said.

"We were not attempting to prop up equity prices, nor did we plan to continue to ease rates until equity prices recovered, as some have erroneously inferred," he said.

"It is the performance of the entire economy that forms our objectives and shapes our actions."

Pub Date: 1/21/99

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