`Robust' growth surprises Fed chief

Greenspan ready to move quickly on interest rates

Central bank

February 24, 1999|By BLOOMBERG NEWS

WASHINGTON -- The U.S. economy continues to expand at a "surprisingly robust" pace with no evidence of inflation, Federal Reserve Chairman Alan Greenspan said yesterday, though he said the central bank is prepared to quickly raise or lower interest rates if "imbalances and distortions" in the economy develop.

"Our economy's performance should remain solid this year, though likely with a slower pace of economic expansion and a slightly higher rate of overall inflation than last year," Greenspan told the Senate banking committee.

But some economists are predicting the Fed will be forced to raise interest rates later in the year. "We do think the risks of [a Fed interest-rate increase] are rising very fast as this economy continues to boom," said Suzanne Rizzo, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. "Unless we see a slowdown by summer, we expect the Fed to tighten in the second half."

Higher prices haven't materialized, however, and the Fed chairman said the U.S. economy is now "less inflation prone than in the past."

But he also said the economy is at risk of a slowdown later this year that is steeper than the Fed is forecasting. Such a decline could require lower interest rates to sustain the longest expansion in peacetime history.

Greenspan issued a less-cautionary warning than he has in the past that U.S. stock prices may be too high. "Equity prices are high enough to raise questions about whether shares are overvalued" -- if the economic growth cools as the Fed is forecasting and corporate earnings growth slows, he said.

While Greenspan's overall message was one most investors expected, he went out of his way to suggest that the Fed isn't sure of the economy's future direction.

After eight years of expansion, "the economy appears stretched in a number of dimensions," he said, and could as easily slow significantly or overheat.

"Monetary policy must be ready to move quickly in either direction should we perceive imbalances and distortions developing that could undermine the economic expansion," Greenspan said.

Fed policy-makers have been counting on the economy slowing from 1998's 4 percent growth rate to keep inflation in check and sustain the expansion, now the longest in peacetime. The Fed's rating-setting body, the Federal Open Market Committee, has left interest rates unchanged at its last two meetings because "the markets have recovered appreciably," he said.

Given that, Greenspan suggested some concern that the Fed may have gone too far Nov. 17 in cutting the overnight bank loan rate to 4.75 percent, which was the last of three 25-basis-point cuts.

"The Federal Reserve must continue to evaluate, among other issues, whether the full extent of the policy easings undertaken last fall to address the seizing up of financial markets remains appropriate as those disturbances abate," he said.

The Fed's latest economic forecast calls for the economy to grow at a 2.5 percent to 3 percent inflation-adjusted rate this year. The central bank expects that growth rate would keep unemployment close to its current level throughout the year, ranging between 4.25 and 4.5 percent.

The Fed also expects the Consumer Price Index to rise no more than 2.5 percent this year, a slight increase from 1998's 1.6 percent increase.

Developments in overseas economies also continue to pose considerable risk, he said.

While South Korea and Thailand have made progress, the economic outlook in Russia "remains troubling," Greenspan said. And Brazil must contain inflation while cutting a budget deficit.

Pub Date: 2/24/99

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